Blog Posts — February 2, 2022

Axioma North America Linked Model: The missing link for modeling Canadian equity funds

Historically Canadian equity managers have had difficulty accurately modeling their investment universe across the US and Canada. Compared to those of Canada, the US economy and stock market are much larger making it difficult to properly represent Canada in these types of investment strategies. North America regional risk models used to construct portfolios just aren’t able to capture the nuances of both markets and will be largely dominated by the US.

That’s why we created the Axioma North America Regional Linked Model. The North America Linked Model connects our US and Canada Equity Factor Risk Models for more flexible and tailored risk forecasting and attribution for Canadian managers. By linking these two models, managers receive insight on the important drivers of their portfolio risk within each local market.

We recently published a case study to provide a real-world analysis of how this linked approach can provide optimal portfolio performance results and alignment to mandates for a Canadian equity manager. This case study illustrates the efficacy of this approach using an active Canadian equity strategy benchmarked to the traditional S&P/TSX Capped Composite Index. We analyze this simulated strategy over a trailing 3-year period ending in the 3rd quarter of 2021, using our medium-horizon North America Factor Risk Model compared to the medium-horizon North American Linked Model. Through a series of comparisons of the two models based on active return across industries, style factors exposures and return contribution, we find that the North America Linked Model is a better fit than the regional model.

By linking together two industry-leading single country models (Axioma US Equity Factor Risk Model – AXUS4 and Axioma Canadian Equity Factor Risk Model – AXCA4) into a single model, Canadian equity managers benefit from full coverage for a Canadian equity portfolio that allocates any amount of its investment and risk budget to the US, without sacrificing the specificity of the distinct factors that drive systematic returns in the Canadian market, and distinctly, the US market as well.

Download the case study here.