PIQ uses and distributes FTSE/BIRR Factor Return/Risk data. The FTSE/BIRR model is a macro factor based Arbitrage Pricing Theory (APT) system developed by Edwin Burmeister, Roger Ibbotson, Stephen Ross and Richard Roll. The creators of this modeling are renowned academics and practitioners in the field of finance and this model is unique in the field of APT modeling.
FTSE/BIRR factors are integral components of PIQ’s risk forecasting models.
FTSE/BIRR factors measure an investment’s (portfolios and individual securities) sensitivity to changes in macroeconomic factors such as the business cycle, interest rates and investor confidence. Understanding these exposures is critical when assessing an investment’s risk expectations and return drivers.
FTSE/BIRR factors measure an investment’s (and portfolio of investments’) sensitivity to changes in macroeconomic factors such as the business cycle, interest rates and investor confidence. Understanding these exposures is helpful when assessing an investment’s risk expectations and return drivers.
PIQ reports each company’s sensitivity to important macroeconomic events. The system also allows the user to input their own expectations for changes in these events resulting in a forecasted return for the company being reviewed.
The return factor sensitivities are calculated by FTSE/BIRR. FSTE/BIRR’s sophisticated APT model decomposes a portfolio’s return across a number of important economic events. The sensitivity to these events is reported in a table and also graphically as shown below. The overall equity market sensitivities to these same factors of returns are also presented in the report.
The FTSE/BIRR factors include:
Investor Confidence: as measured by relative changes in bond market prices and credits spread.
Business Cycle: as measured by changes in economic production reflected by GDP or Real Final sales at the National Accounts level.
Inflation: reflected by the general rise in the prices of goods and services.
Time Horizon: this factor measures the impact that changes in the shape of the yield curve has on companies.
Market Sensitivity: the portion of the return that is not described by changes in macroeconomic events. The FTSE/BIRR model attributes these unexplained returns to returns in the general equity market.
For reference PIQ also reports a company’s overall investment value relative to the market. This number is referred to as the Value Composite and measures various investment related Price Multiples relative to those same multiples across the broad market. Numbers Below/Above 1.0 indicate Higher/Lower investment value relative to the market. PIQ also include the classic CAPM Beta as another point of common reference. These additional references are not part of the FTSE/BIRR analysis or factor modeling. In the example above Cisco shows less sensitivity to most macro factors. Exceptions are interest rate sensitivity and a generally higher sensitivity to equity markets. The value composite suggests that Cisco is 30% cheaper or higher value than the market when measured by price multiples. This suggests a high value company with low economic sensitivity.
PIQ also reports additional market related data for each portfolio - these include aggregate Value Composite and CAPM Beta. Aggregate investment value relative to the market is labeled as the Value Composite and measures various investment related Price Multiples relative to those same multiples across the broad market. Numbers Below/Above 1.0 indicate Higher/Lower investment value relative to the market. Classic CAPM Beta as another point of reference. These two additional items are not part of the FTSE/BIRR return forecasting models and are included to provide addition relative information about the portfolio holdings.
In the example above the portfolio is less sensitivity to all of the factors. In a challenging economic environment this portfolio would likely prove to be defensive. The returns associated with economic events will be lower and or more stable. Market sensitivity and Beta both forecast that this portfolio will be less sensitive to general movement in the overall equity markets. The forecast is for a portfolio with relatively stable investment returns.
The value composite suggests that the portfolio is 26% cheaper or higher value than the market when measured by price multiples. This provides an additional confirmation of expected stability. Users can also input their own economic expectation to forecast their expected return.
This analysis is also available for whole portfolios providing an interesting prospective and insight to user holdings.
Changing the forecast is simple. A snap shot of the forecast is above. There are 6 events that can be adjusted. Of course leaving the forecast at the defaults is an option as well. The PIQ option is to leave the model at the FTSE/BIRR averages for factor payoffs.
User Economic Forecasts
Users can also input their own economic expectations to review how this model would forecast the company’s future returns versus the market. This analysis is also available for user portfolios providing an interesting prospective and insight to user holdings.
A separate PIQ FTSE/BIRR User license will be required in order to have access the FTSE/BIRR factors and to execute forecasts using the FTSE/BIRR data. PIQ views FTSE/BIRR as a strong collaborative investment management tool and encourages users to investigate the total FTSE/BIRR tool kit.