For Institutional Investors Only

Information contained on this Website is published solely for general informative purposes and intended only for United States institutional investors, consultants, and financial advisers, and other intermediaries who are who are knowledgeable and experienced in the financial services market and in investment products of this nature. If you are a retail or individual investor then please leave this website immediately. The information is not authorized for use in a jurisdiction where distribution is not authorized and is not intended for distribution to retail clients. If you choose to access this Website from locations outside of the United States, you do so at your own initiative and risk, and are responsible for compliance with all applicable laws.

By accessing this site you confirm that you are an Institutional Investor, you agree not to forward or make the contents of this site available to any person who is not an Institutional Investor, and you agree to be subject to intechinvestments.com terms of use.


Redirect Me to JanusHenderson.com

Uncertainty abounds with this year’s increased equity market volatility. But while we’ve seen increased market volatility, we’ve also seen an increase in relative stock price volatility. In other words, we’ve seen an increase in stock prices moving differently from other stocks and the overall market. This is called dispersion.

The increase in dispersion is important for two reason. First, it’s an ever-present alpha source for us and available in both up and down markets. And second -- important to all of our readers – dispersion has been extremely low for some time now which can suggest a high level of equity market stress. It’s important for investors of all stripes to understand dispersion and its implications on investing.

Understanding Return Dispersion

Dispersion measures whether stocks’ returns relative to their benchmark are converging (low dispersion) or diverging (high dispersion). As dispersion increases, underlying stock or portfolio returns begin to diverge from the overall market, offering opportunities for active management.

This can often be explained by the fact that active returns are a function of cross-sectional volatility and active share. For example, if the cross-sectional volatility of the equity market is zero, meaning that all stocks perform exactly the same, then all active portfolio returns equal the return of the benchmark regardless of a manager's active bets. However, substantially high OR low dispersion is generally associated with strain on the market.  Right now, dispersion is abnormally low, which is suggestive of groupthink among equity market participants.

Groupthink can drive many decisions – some good, some bad. But when it drives the market it’s a leading indicator of a market shock. In the first half of 2018, we observed a slight uptick in the dispersion of returns measure since the end of last year, confirming a slight increase in cross-sectional volatility. Despite the uptick, stocks’ relative volatility in the U.S. remains very low by historical standards, reflecting a market that continues to be driven by sentiment and macroeconomic dynamics rather than stocks’ underlying fundamentals. And while we aren’t seeing the historic lows that we saw in 2014, we are lingering in an area of abnormally low dispersion.

Historical Dispersion Levels

As shown in Figure 1, dispersion was abnormally high during the build-up and aftermath of the tech bubble. It was abnormally low during the 2005-2007 period – similar to where we are today.

Dispersion of Returns_123117

Dispersion is Not Enough

Dispersion of returns is one of five metrics we believe are reliable indicators of equity market stress and a component of the new Intech Equity Market Stress Monitor™.  This new risk profile of the equity market – a collection of five reliable indicators of market strain – help identify different risk regimes and associated tail-risk.

Learn about the other indicators of strain in the market and how to use the monitor in your everyday work by downloading the eBook and quarterly report below.

View the latest Intech Equity Market Stress MonitorTM quarterly report that  offers our analysis of the data.

Intech Equity Market Stress MonitorTM  Download the eBook that serves as a guide to our monitor. Download Now

The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. This information should not be used as the sole basis for investment decisions. All content is presented by the date(s) published or indicated only, and may be superseded by subsequent market events or other conditions. Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal and fluctuation of value.

Subscribe to Email Updates