Morningstar assess `fat tails' with new risk tool
Morningstar has launched a global risk model designed to help investors evaluate 40,000 stocks and 10,000 funds along 36 characteristics, including style, sector, region and currency. Six of them are based on Morningstar's proprietary ratings. The methodology incorporates "fat tails," or extreme events, when assessing potential investment returns. "The model will enable clients to perform more of their workflow within a single piece of software, providing significant efficiency gains," said Warren Miller, head of asset-management software at Morningstar.

Morningstar has launched a global risk model to help investors analyse stocks and equity portfolios and let them better understand an investment's factor exposures in order to build forecasts of future returns.

The new model had 36 factors, aimed at decomposing the sources of return and risk for a stock or a portfolio, which included style, sector, region and currency characteristics, among others, while six of them were based on Morningstar's proprietary ratings.

According to Morningstar, its global risk model, which evaluates more than 40,000 stocks and 10,000 equity funds, would also help investors screen individual stocks or equity funds or make comparisons based on any of the factors.

Head of asset management software for Morningstar, Warren Miller, said that most of all, the new model would offer investors an opportunity to research securities and construct portfolios to make more informed investment decisions.

Risk analysis is paramount to the investment decision-making process. Our model uses unique factors such as sustainable competitive advantage and ownership data to provide a powerful lens with which to understand the risk of a stock or portfolio,

In addition, our risk model methodology incorporates ‘fat tails', or extreme events, among investment returns when forecasting the distribution of future returns, instead of relying on normal distribution,

The model will enable clients to perform more of their workflow within a single piece of software, providing significant efficiency gains, he added.

Morningstar also said that it planned to expand the risk model to additional asset classes in the future and would add related factors to its data feeds later this year.