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In this article, the author discusses current structural research and investment trends that are shaping the future of factor investing. Specifically, the author focuses on three emerging trends: the ongoing evolution of traditional factor models and strategies, recent innovation in data sources and modeling techniques, and the potential disruption from integrating factor strategies into the asset allocation process. Key Findings ▪ Factor models and strategies evolve gradually over time, reflecting the evolution of capital markets and advances in academic theory, data availability, empirical research, and investment practice. ▪ Current innovation efforts in factor investing focus on exploiting new unstructured data sources, applying new data science modeling techniques, and integrating sustainability and climate factors. ▪ Innovation in factor investing is reshaping the traditional asset allocation paradigm by creating new opportunities for investors to express active investment views through a factor allocation process.

Factors are the underlying forces that drive portfolio risk and performance over different investment horizons. In this article, first the author reviews the theoretical foundations and practical applications of factor models. The author then discusses the integration of factors into different types of investment strategies. He concludes with a discussion of how factor models and strategies enable investors to manage total portfolio risk and capture risk premiums through the asset allocation process. TOPICS:Factor-based models, portfolio construction, risk management, performance measurement Key Findings ▪ Factor models empower investors to understand and manage the sources of portfolio risk. ▪ Factor strategies reflect factors, offering investors the ability to capture factor premiums. ▪ In factor allocation, factors replace asset classes as the drivers of asset allocation decisions.

Here, we present an updated assessment of projected climate change over Greece in the near future and at the end of the 21st century. The analysis is based on an ensemble of 11 high-resolution EURO-CORDEX simulations based on historical emission data and three different greenhouse gas concentration scenarios, namely, RCP2.6, RCP4.5, and RCP8.5. Our results strongly point towards a warmer future under all the examined RCPs. Under the extreme RCP8.5 scenario, temperature is expected to increase on average by 1.6 oC (12%) in the near future and 4.3 oC (33%) at the end of the century. The number of hot days and tropical nights per year is expected to increase significantly and the number of frost days to decrease. Also, the future will be possibly drier, with statistically robust results for the end-of-the-century period under RCP8.5 only. On average, precipitation is expected to decrease under RCP8.5 by -0.4 mm day-1 (-16%) and the number of consecutive dry days per year to increase by 15.4 days (30%) at the end of the century.The authors acknowledge funding from the Action titled "National Νetwork on Climate Change and its Impacts - CLIMPACT" which is implemented under the sub-project 3 of the project "Infrastructure of national research networks in the fields of Precision Medicine, Quantum Technology and Climate Change", funded by the Public Investment Program of Greece, General Secretary of Research and Technology/Ministry of Development and Investments.

BACKGROUND AND AIM: In the LIFE ASTI project a forecasting system for estimating the urban heat island intensity (UHI) and defining high resolution heat health watch warning systems was developed i...

In this article, the authors review factor performance in global equity markets using coherent data and methodology and apply a new template to evaluate their backtests for potential selection bias under multiple testing. They then propose a systematic process for integrating factor information into different investment strategies. The authors show that this process is consistent with the Black–Litterman framework and test it on a sample of market indexes and active equity portfolios. Integrating factors in indexes improved risk-adjusted performance while retaining high liquidity and capacity. Adding factors to active strategies enhanced information ratios while maintaining the portfolio characteristics and stock selection alpha of the original strategies. The authors’ analysis may have important implications for different types of investors. Asset owners may be able to tilt reference indexes toward rewarded factors without sacrificing market coverage and diversification. Index managers can track factor-tilted indexes because they remain investable and replicable. Finally, active managers may be able to incorporate factor information into their strategies to harvest factor premiums while preserving their core investment process and the added value from fundamental security selection. TOPICS:Factor-based models, portfolio management/multi-asset allocation, style investing

Many studies have focused on the relationship between companies with strong environmental, social, and governance (ESG) characteristics and corporate financial performance. However, these have often struggled to show that positive correlations—when produced—can in fact explain the behavior. The authors of this article provide a link between ESG information and the valuation and performance of companies, by examining three transmission channels within a standard discounted cash flow model—which they call the cash-flow channel, the idiosyncratic risk channel, and the valuation channel. They tested each of these transmission channels using Morgan Stanley Capital International ESG Ratings data and financial variables. This showed that companies’ ESG information was transmitted to their valuation and performance, both through their systematic risk profile (lower costs of capital and higher valuations) and their idiosyncratic risk profile (higher profitability and lower exposures to tail risk). The research suggests that changes in a company’s ESG characteristics may be a useful financial indicator. ESG ratings may also be suitable for integration into policy benchmarks and financial analyses. TOPICS: ESG investing, security analysis and valuation, risk management

There has been a wide range of research in academia and the asset management industry about the financial benefits of ESG investing. However, the question of how to achieve consistency when integrating ESG has not obtained the same level of attention. As a result, ESG integration currently is often applied inconsistently and incompletely across asset owners’ portfolios. The authors of this article focus on how asset owners can implement ESG integration through index-based allocations to portfolios that seek to replicate ESG indexes. Index-based approaches offer consistency, transparency, and replicability and are generally cost-effective. Over a seven-year study period, global and regional versions of the MSCI ESG Leaders Indexes (as proxies for regional allocations) resulted in significant variations in their respective ESG profiles and performance, but in all instances, there was a clear reduction in all key risk measures.

The spatial distribution, radiative forcing, and climatic effects of tropospheric ozone in China during summer were investigated by using the regional climate model RegCM4. The results revealed that the tropospheric ozone column concentration was high in East China, Central China, North China, and the Sichuan basin during summer. The increase in tropospheric ozone levels since the industrialization era produced clear-sky shortwave and clear-sky longwave radiative forcing of 0.18 and 0.71 W m–2, respectively, which increased the average surface air temperature by 0.06 K and the average precipitation by 0.22 mm day–1 over eastern China during summer. In addition, tropospheric ozone increased the land–sea thermal contrast, leading to an enhancement of East Asian summer monsoon circulation over southern China and a weakening over northern China. The notable increase in surface air temperature in northwestern China, East China, and North China could be attributed to the absorption of longwave radiation by ozone, negative cloud amount anomaly, and corresponding positive shortwave radiation anomaly. There was a substantial increase in precipitation in the middle and lower reaches of the Yangtze River. It was related to the enhanced upward motion and the increased water vapor brought by strengthened southerly winds in the lower troposphere.

The authors examine how a factor allocation can be integrated into an asset owner’s existing roster of active managers. Using a risk-budgeting framework, they have several findings. (1) Asset owners who wish to maintain their existing roster of active managers and incorporate factor views may consider a top-down factor implementation, funded entirely from the core passive allocation. This approach distributed most of the active risk to active managers. (2) Asset owners who wish to preserve their existing roster of active managers and incorporate high-conviction factor views may consider an allocation between active management and a bottom-up factor implementation. This approach more evenly distributed the risk budget to active management and factors and partially funded the factor allocation from active management. (3) Asset owners who pursue a barbell strategy between core passive allocations and concentrated active managers could implement a low-volatility factor allocation, which may lower the total risk of the equity program, releasing active risk budget that can be deployed to active managers.

Minimum volatility strategies enjoy broad support in the academic literature and have been applied extensively by institutional investors to reduce portfolio volatility. In this article, the authors discuss how such strategies can adapt to address risks beyond price volatility. Specifically, concentration, sustainability, and crowding risks could be mitigated using appropriate but simple optimization constraints. However, adding a diversification constraint increased exposure to residual volatility and had a negative impact on risk reduction and risk-adjusted performance. In contrast, to help manage environmental, social, and governance (ESG) risks, adding a significant sustainability constraint had only a small effect on the risk reduction properties. Finally, introducing constraints on the value exposure ensured the market-relative valuations of the strategy remained attractive for only a small increase in realized volatility. The authors show that simple constraints could be used effectively in minimum volatility strategies to manage risks beyond volatility.

This study aims at assessing the differences induced in the Global Horizontal Irradiance (GHI) predictions by the mesoscale atmospheric Weather Research and Forecasting (WRF) model when using different shortwave radiation. Model predictions are compared with GHI measurements at 12 stations of the Hellenic Network of Solar Energy (HNSE) for January, April, July and October 2013. The shortwave radiation schemes that were evaluated are: the Dudhia, the updated Rapid Radiative Transfer Model (RRTMG), the updated Goddard and the Goddard Fluid Dynamics Laboratory (GFDL) schemes. All schemes perform better under cloudless conditions due to limited ability of the WRF model to simulate cloudy conditions. The Dudhia scheme performs best with mean relative difference of 2.2 ± 15% for clear-skies, while the differences for the other schemes range between 5 and 12% with similar standard deviations. For all-skies, the model-derived hourly GHI is overestimated for all schemes (∼40–70%). For the daily averages, the model predictions are in better agreement with the measurements, mainly under all-sky conditions, with deviations of about half those of the hourly data and smaller standard deviations. There are strong indications that the differences of the model predictions from the measurements depend on the solar zenith angle and the amount of aerosols at each station.

Practical Applications Summary In Bridging the Gap: Adding Factors to Passive and Active Allocations, which appeared in the 2018 Quantitative Special Issue of The Journal of Portfolio Management, Anil Rao, Raman Aylur Subramanian, and Dimtiris Melas (all of MSCI, Inc.) argue that asset owners should use risk budgeting to determine the optimal mix of active and passive investments. To support this assertion, the authors examine the effects of different possible active, passive, and factor (top-down or bottom-up) allocations when the active managers have high tracking errors. The authors also examine the effects of using a minimum-volatility strategy to de-risk the equity program. Ultimately, they found that the optimal allocations were around 40% passive, 30-40% active, and 20-30% factor allocation, with differences in funding source and risk allocation.

The annual and diurnal behavior of the temperature differences in urban areas is important to predict the possible impacts of the future land-use development on climate change and air pollution in heavily populated areas. The behavior of the temperature as well as wind spatio-temporal differences in turn is strongly interconnected with the turbulent and radiative fluxes variability. A 3-year dataset from three automated micrometeorological stations run by the Regional Agency for Environment Protection of Lazio and located in and around the city of Rome is used. The distribution of the urban heat island intensity for the whole period of measurements peaks at 1 °C, but higher values are frequently registered especially referring to differences with the coastal site also due to the sea-breeze cooling effects. The city is generally drier and characterized by winds of lower intensity reaching their maximum 1 h later with the respect to the sub-urban/coastal sites during the afternoon. The micrometeorological data are also analyzed to estimate some key parameter characteristic of the terrain, which represents the main forcing in the numerical models for UHI estimates, such as the albedo, aerodynamics and atmospheric turbulence parameters.

Practical Applications Summary In Managing Risks Beyond Volatility, from the Fall 2017 issue of the Journal of Index Investing, authors Mehdi Alighanbari, Stuart Doole, and Dimitris Melas, all of MSCI, discuss how well investment strategies that minimize price-volatility risk address other risks not directly targeted by a traditional minimum-volatility strategy, such as concentration, sustainability, and crowding. By applying factor models, the authors examine whether minimum-volatility strategies guard against these other risks, or if they do not, how such strategies could be modified to do so without compromising their fundamental mission of minimizing overall portfolio volatility. Minimum-volatility strategies, by selecting for low-volatility and weakly correlated assets, innately promote diversification. The authors demonstrate that adding a diversification constraint to portfolio management may in fact be counterproductive to a minimum-volatility investment approach. In contrast, mitigation of crowding risk, and, to some extent, sustainability risk, can be enhanced through portfolio-construction constraints without compromising a minimum-volatility strategys fundamental objective. Therefore, a minimum-volatility strategy properly incorporating some methodological constraints into portfolio design can effectively mitigate some risks other than volatility, especially from overvalued assets that may increasingly take over a minimum-volatility portfolio’s composition over time.

1. Dimitris Melas 1. is a managing director and global head of Equity Research at MSCI in London, U.K . (dimitris.melas{at}msci.com) In this editorial, I argue that factor investing, also known as smart beta, is having a profound and lasting impact on the way long-term investors construct

This article investigates the commonality in risk factors and sector biases in managed volatility equity strategies (both active and passive). A unique aspect of this article is that it is written from the perspective of a user of the strategies. Unlike all other past studies it considerers several versions of low volatility strategies—from different managers with different investment approaches and risk models. The findings here are therefore more general and not specific to a particular implementation or risk model. We will explore both actively managed volatility strategies as well as an index strategy.

In the past 10 years, ESG considerations have increasingly become integrated into mainstream portfolio management. A large number of long-term institutions such as pension funds, sovereign wealth funds, insurance companies, endowments and foundations have signed up to the UN Principles for Responsible Investment. Many of these institutions either make allocations to segregated ESG mandates or incorporate ESG criteria across their entire portfolio. Asset managers have responded to this increasing demand from asset owners and have started to integrate ESG into their strategies using mechanisms ranging from exclusions based on screening to full integration into the security selection and portfolio construction process.

Modelling the effects of climate change on air quality over Central and Eastern Europe: concept, evaluation and projections Katarzyna Juda-Rezler, Magdalena Reizer, Peter Huszar, Bernd C. Kruger, Prodromos Zanis, Dimiter Syrakov, Eleni Katragkou, Wojciech Trapp, Dimitris Melas, Hristo Chervenkov, Ioannis Tegoulias, Tomas Halenka 1Faculty of Environmental Engineering, Warsaw University of Technology, 00-653 Warsaw, Poland 2Department of Meteorology and Environment Protection, Charles University, 180 00 Prague, Czech Republic 3Institute of Meteorology, University of Natural Resources and Life Sciences, 1190 Vienna, Austria 4Department of Meteorology and Climatology, Aristotle University of Thessaloniki, 54124 Thessaloniki, Greece 5Department of Air and Water Pollution, National Institute of Meteorology and Hydrology, 1784 Sofia, Bulgaria 6Laboratory of Atmospheric Physics, Aristotle University of Thessaloniki, 54124 Thessaloniki, Greece 7Air Protection Unit of Ekometria, 80-299 Gdansk, Poland 8National Institute of Meteorology and Hydrology, Branch Plovdiv, 4000 Plovdiv, Bulgaria

This study explores the ideas of Greek prospective primary teachers about the anthropogenic greenhouse effect, particularly about its causes, consequences and cures. For this purpose, a survey was conducted: 265 prospective teachers completed a closed-form questionnaire. The results showed serious misconceptions in all areas (causes, consequences and cures). The most prominent misconception found by this survey is the conflation between the greenhouse effect and the ozone layer depletion, which is widely reported in the literature. There is also the notion that ‘good things’ (like clean beaches) can help ameliorate the greenhouse effect, whereas ‘bad things’ (like insecticides) can enhance it. One of the secondary results of the survey is that prospective teachers’ main source of information about the greenhouse effect is school. This calls for educational interventions to fight misconceptions at the source. Some suggestions are presented in this paper. The results of this study are compared with the results of two similar studies conducted in the UK and in Turkey.

The short–term prediction of near surface ozone levels is very important due to the negative impacts of ozone on human health, climate and vegetation. The objective of this paper is to develop and test an analytical model that could be applied to predict next day's maximum ozone concentration for the first time in Tirana, Albania, where ozone's monitoring has been recently started. The relationship of the daily maximum hourly ozone values with meteorological variables, including near surface air temperature and relative humidity and with air pollution variables like the persistency of ozone levels and its seasonal variation is examined. The data analysis reveals that the pollution persistency and the near surface air temperature are the factors that mainly affect the peak ozone levels. Multiple linear regression analysis has been performed to establish the relationship between the above mentioned parameters and peak ozone concentration. The agreement between observed and predicted daily maximum hourly ozone values is very good, with a correlation coefficient (R) of 0.87. The model slightly under–predicts the ozone concentration while no significant mispredictions are observed. Additionally, the model’s ability to predict the exceedances of a specific ozone limit value is examined. The model successfully predicts the exceedances of 105 μg m −3 , a value that corresponds to the 75 th percentile, in the 86% of the cases applied.

Typical multi-asset-class portfolios can be dominated by equity risk, even when the allocation to equities is relatively modest. Achieving risk parity between equities and fixed income in an unlevered portfolio would require significant rebalancing towards fixed income. While such rebalancing can lead to a reduction in risk, portfolios with high fixed-income allocations have historically underperformed equity-dominated portfolios. However, achieving risk parity through leverage, while keeping the initial asset allocation constant, would typically require substantial levels of leverage and could lead to a significant increase in portfolio volatility. The authors combine rebalancing and leverage to construct risk parity portfolios that target the same expected return and the same portfolio risk as the initial asset allocation and examine the performance of these portfolios in different market conditions.

This paper provides a comprehensive overview of the actual knowledge on the atmospheric pollution sources, transport, transformation and levels in the East Mediterranean. It focuses both on the background atmosphere and on the similarities and differences between the urban areas that exhibited important urbanization the past years: the two megacities Istanbul, Cairo and the Athens extended area. Ground-based observations are combined with satellite data and atmospheric modeling. The overall evaluation pointed out that long and regional range transport of natural and anthropogenic pollution sources have about similar importance with local sources for the background air pollution levels in the area.

This article presents alternative methods for constructing factor-replicating portfolios, which include portfolios that have unit exposure to a target factor, zero exposure to other factors, and minimum portfolio risk. The authors provide empirical evidence that constrained factor portfolios, with a limited number of assets and relatively low turnover, tracked several Barra equity risk model pure factor returns reasonably well. They also illustrate how factor-mimicking portfolios could have been utilized in the past to enhance both passive and active investment strategies. Factor-mimicking portfolios can be used to hedge out the unintended factor exposures of conventional benchmarks, which are aimed at targeting a particular beta factor, and thus enable plan sponsors to better manage their optimal allocations to beta factor risks. Additionally, factor-mimicking portfolios can be utilized to hedge out the style exposures of active stock-picking strategies enabling active managers to capture pure alpha.

Modern European cities are characterized by high particulate matter (PM) concentrations. Unfortunately, the number of stations monitoring air pollution, especially PM, is never sufficient for the overall representation of the problem. In the present work, an inexpensive outdoor passive sampler (based on an indoor passive sampler) was developed and assembled in an effort to provide the means to extend current PM monitoring networks. The uncertainty of the sampler was tested in vitro and in vivo. Twenty such outdoor passive samplers were assembled and installed at specific locations in the Greater Thessaloniki Area and measurements of PM were carried out. The results were in good agreement with the official monitoring stations. In addition, they revealed the aggravated air quality in the center of the city and in the west suburbs.

During the summer of 2007 several Greek regions suffered periods of extreme heat, with midday temperatures of over 40 degrees C on several consecutive days. High temperatures were also recorded on the east coast of central Greece, where a complex sea breeze circulation system frequently develops. The more intense events occurred at the end of June and July. The highest temperatures were observed on 26 June and 25 July, while the sea breeze developed only on 25 July. Meteorological data collected at two sites-a coastal urban location and an inland suburban site that is not reached by the sea breeze flow-as well as pollution data collected at the urban site, were analysed in order to investigate the relationship between sea breeze development and the prevailing environmental conditions during these two heat wave events. The analysis revealed that sea breeze development affects temperature and pollution levels at the shoreline significantly, causing a decrease of approximately 4 degrees C from the maximum temperature value and an increase of approximately 30% in peak PM10 levels. Additionally, several stress indices were calculated in order to assess heat comfort conditions at the two sites. It was found that nocturnal comfort levels are determined mainly by the urban heat island effect, the intensity of which reaches up to 8 degrees C, while the applied indices do not demonstrate any significant daytime thermal stress relief due to sea breeze development.

Ambient aerosol concentrations have been implicated in human health effects, in visibility reduction in urban and regional areas, in acid deposition and in perturbing the Earth’s radiation balance. The main concern of the air quality managers is to achieve compliance to the established air quality standards (AQS). As AQS are exceeded in numerous sites worldwide, it is essential to reduce the emissions. Having decided which statistical distribution fits well to the PM10 parent distribution, it is feasible to estimate the reduction in emissions that is required in order to meet AQS. In this study, it is verified that the PM10 concentration distribution can be adequately simulated by lognormal distribution, a conclusion drawn by the calculation of several statistical indexes. The study area is the city of Volos in central Greece, which is experiencing an unpleasant situation concerning the levels of PM10 pollution. The probability density function of lognormal distribution is capable to predict the number of days when the European Union (EU) AQS for PM10 concentration are exceeded in Volos area. Furthermore, the minimum reduction in current emission sources of PM10 required in order to meet the air quality regulations that are established by the EU is calculated for the study area and is found to be ~33%. The results could be utilized as reference for air pollution control strategy.

Bender et al . discussed six factors – value , low size , low volatility , high yield , quality and momentum – that historically have earned a premium over long periods, represent exposure to systematic sources of risk and have strong theoretical foundations. They also discussed how these factors could be captured through indexation. In this chapter, we turn to the question of how institutional investors interested in factor investing may allocate to and across factors.

This article shows that portfolios that aim to diversify across countries and across industries provide markedly better reward-to-risk ratios than the traditional asset allocation strategies that aim to select country positions and then index local broad market indexes. Country asset allocations are distinctly different under each strategy. The results hold across nationality of investors, across alternative benchmarks, and across alternative currency hedging strategies.

This paper is the second in a three-paper series focusing on factor investing. In the first paper, “Foundations of Factor Investing”, we discussed six factors — Value, Low Size, Low Volatility, High Yield, Quality and Momentum — that historically have earned a premium over long periods, represent exposure to systematic sources of risk, and have strong theoretical foundations. We also discussed how they could be captured through indexation. In this paper, we turn to the question of how institutional investors interested in factor investing may allocate to and across factors. In particular, we introduce a new framework for how institutional investors might consider implementing factor allocations through a passive mandate replicating a single multi-factor index. We call this type of allocation a multi-factor index allocation. Multi-factor indexes combine select factor indexes into single mixes created and controlled by the investor. Multi-factor indexes historically have demonstrated four key benefits: diversification, transparency, cost-efficiency via reduced turnover, and flexibility.

Factor investing is based on the existence of factors that have earned a premium over long periods, reflect exposure to systematic risk, and are grounded in the academic literature. Early financial theory established that for stocks, exposure to the market was a significant driver of returns (e.g., the CAPM). Later, researchers like Barr Rosenberg, Eugene Fama and Kenneth French extended the CAPM to include certain systematic factors that also were important in explaining returns. Tilts towards these factors such as Value, Low Size, and Momentum historically produced excess long-term returns and there were strong theoretical foundations behind these factors. Until now, passive investing has focused on capturing market beta through market capitalization weighted indexes. The only way institutional investors could get access to factors was through active management. Indexation is opening a new way for factor investing today by allowing investors to access factors through passive vehicles that replicate factor indexes. MSCI Factor Indexes provide access to six solidly grounded factors — Value, Low Size, Low Volatility, High Yield, Quality and Momentum. These indexes have historically earned excess returns over market capitalization weighted indexes and experienced higher Sharpe Ratios. This paper is the first in a three-paper series focusing on factor investing.

MSCI Value Weighted Indices are systematic indices that aim to reflect the value premium by employing an alternative weighting scheme that tilts the index towards stocks with lower valuation ratios. In this paper, we review the theoretical aspects of value weighted indices and through empirical studies we discuss the important facets of index construction that underpin the design of MSCI Value Weighted Indices. The MSCI Value Weighted Indices are based on an objective and transparent methodology by which all the constituents of a standard MSCI parent index are re-weighted using four common accounting measures: book value, sales, earnings and cash earnings -- thereby adding a value tilt to the parent MSCI index towards stocks with relatively lower valuation ratios. Based on the empirical results, the MSCI Value Weighted Indices have historically outperformed their respective parent MSCI indices across different regions, reflecting the value premium, with slightly higher risk, low tracking error and modest turnover. The empirical finding on the long term outperformance of MSCI Value Weighted indices is consistent with the long history of published research on the value premium. MSCI Value Weighted Indices are complementary to capitalization weighted indices and could serve as tools in strategic asset allocation to enable investors to gain exposure to market beta with a value tilt.

This paper examines the recent trend of adding leverage to fixed income allocations of multi-asset class portfolios of large asset owners. We show that the optimality of adding leverage from a volatility-reduction perspective depends on the correlations between bonds and equities, the relative volatility of bonds versus equities, and the weights of the two asset classes in the portfolio. If correlations between bonds and equities are negative, adding leverage could reduce the volatility of a portfolio, especially if the weight in fixed income assets is low, leverage is moderate, and bonds have a low risk relative to equities. Negative correlations also increase the likelihood that adding leverage will improve the risk-return profile of the portfolio. Asset owners considering adding leverage to their fixed income allocation can examine these influences to decide whether negative correlations between bonds and equities, a low ratio of bond to equity volatility, and higher risk-adjusted returns of bonds relative to equities are likely to persist.

MSCI Barra has recently published three research papers that examine the current equity asset allocation practices in the US, UK, and Japan and identify an increasing adoption of a global approach to equity allocation. This paper reviews the current strategic equity allocation policies of European institutional investors. It discusses the evidence that challenges the separation of equity policy portfolio into domestic/international allocations or regional allocations at the strategic level, and the rationale and potential benefits of an integrated global approach to equity allocation.

The market turmoil of 2008 highlighted the importance of risk management to investors in the UK and worldwide. Realized risk levels and risk forecasts from the Barra Europe Equity Model (EUE2L) are both currently at the highest level for the last two decades. We explore the historical diversification effects of an international allocation for UK investors. We illustrate that investing only in the UK market can be considered an active deviation from a global benchmark. A UK domestic strategy has high concentration, leading to high asset-specific risk, and significant style and industry tilts. We show that an international allocation resulted in higher returns and lower risk for a UK investor in the last one, three, five, and ten years. In GBP terms, the MSCI All Country World Investable Market Index (ACWI IMI) - a global index that could be viewed as a proxy for a global portfolio - achieved higher return and lower risk compared to the MSCI UK Index during these periods. The decreases in risk represented by allocations to MSCI ACWI IMI were robust based on four different measures of portfolio risk.

We present alternative methods for constructing factor mimicking portfolios in practice. We illustrate how portfolios with a limited number of assets and relatively low turnover can be used to track pure factor returns. These portfolios provide an effective instrument to support the practice of investment management. We illustrate how they can be used to hedge out unintended factor exposures of a passive benchmark thus facilitating the optimal management of beta exposure. We illustrate how they can be used to hedge out unintended factor exposures of an active strategy thus isolating pure alpha and facilitating the management of alternative sources of alpha.

Ozone air pollution is identified as one of the main threats bearing upon human health and ecosystems, with 25 000 deaths in 2005 attributed to surface ozone in Europe (IIASA 2013 TSAP Report #10). In addition, there is a concern that climate change could negate ozone pollution mitigation strategies, making them insufficient over the long run and jeopardising chances to meet the long term objective set by the European Union Directive of 2008 (Directive 2008/50/EC of the European Parliament and of the Council of 21 May 2008) (60 ppbv, daily maximum). This effect has been termed the ozone climate penalty. One way of assessing this climate penalty is by driving chemistry-transport models with future climate projections while holding the ozone precursor emissions constant (although the climate penalty may also be influenced by changes in emission of precursors). Here we present an analysis of the robustness of the climate penalty in Europe across time periods and scenarios by analysing the databases underlying 11 articles published on the topic since 2007, i.e. a total of 25 model projections. This substantial body of literature has never been explored to assess the uncertainty and robustness of the climate ozone penalty because of the use of different scenarios, time periods and ozone metrics. Despite the variability of model design and setup in this database of 25 model projection, the present meta-analysis demonstrates the significance and robustness of the impact of climate change on European surface ozone with a latitudinal gradient from a penalty bearing upon large parts of continental Europe and a benefit over the North Atlantic region of the domain. Future climate scenarios present a penalty for summertime (JJA) surface ozone by the end of the century (2071-2100) of at most 5 ppbv. Over European land surfaces, the 95% confidence interval of JJA ozone change is [0.44; 0.64] and [0.99; 1.50] ppbv for the 2041-2070 and 2071-2100 time windows, respectively.

[1] The Photochemical Activity and Ultraviolet Radiation (PAUR) II project (a continuation of an earlier PAUR I project) had the purpose of studying the interrelationships between changes in total ozone, tropospheric aerosols, UV radiation and photochemical activity. As part of PAUR II project, a campaign took place in Greece and Italy during May–June 1999, with the participation of 15 European and 3 American research institutions. A variety of radiation and gaseous and aerosol atmospheric composition and optical characteristics measurements were made during the campaign. Radiative transfer models and three-dimensional (3-D) regional chemistry transport models (CTM) were applied and compared to the available data set of PAUR II. The present overview paper gives an introduction to the project and to the meteorological and environmental conditions that prevailed and outlines some results that are extensively described in the subsequent papers which form this special section. The modulation of the UVB field in the presence of different types of aerosols, its transmittance and role in the photochemistry of the particular eastern Mediterranean environment is overviewed. Using a 3-D CTM, it is shown that even a 50% reduction in Greek anthropogenic emissions has only a small effect in reducing the ozone levels over the eastern Mediterranean in summer. The environmental conditions, which prevailed during the PAUR I and PAUR II campaigns, offered cases of background conditions over the Aegean Sea as well as conditions with Saharan dust episodes and extremes in total ozone.

The NOPEX two concentrated field efforts (CFEs) (June 1994 and April–July 1995) provide high quality data sets for the Boreal environment. The analysis of these data with traditional meteorological and hydrological approaches allow estimations of fluxes of latent and sensible heat, but these flux estimates are not directly comparable due to differences in temporal and spatial scales. The challenge here has been to overcome these difficulties so that the different estimates can be critically compared and evaluated in a systematical way. Five different approaches for the estimation of the regional flux of sensible and/or latent heat over the NOPEX area have been evaluated: (1) Direct aggregation — mixed layer evolution method, (2) Weighted averages of (a) aircraft measurements in the boundary layer and of (b) mast measurements, (3) Numerical models (a) ECOMAG — a distributed hydrological model and (b) MIUU — a mesoscale meteorological model. In general, good agreement was found between the regional estimates of the sensible heat flux, based on the mixed layer evolution method and land use weighted mast measurements. The aircraft measurements were found to be systematically smaller than the land use weighted mast estimates. For the latent heat flux good agreement was found between the regional latent heat flux derived from airplane measurements, land use weighted mast estimates, and the two mesoscale numerical models.

A statistical analysis of ozone and PM10 concentration levels in the area of Volos, a medium-sized Greek coastal city, was carried out for the period 2001-2003. The data analysis revealed that the Daily Maximum Hourly (DMH) value of ozone concentration reaches a maximum of 160 µg/m³ during summer; it is observed during afternoon hours and is associated usually with winds from southern directions. This is attributed to the impact of the sea breeze on pollution levels. Concerning PM10 concentration, it was found that its DMH values are quite high and that its Daily Average (DA) value exceeds the limit value of 50 µg/m³ for approximately 38% of the days. The daily cycle shows two maxima (morning-evening) and in these cases the wind is typically from north-northwest directions. The weekly and seasonal variance of DA values of PM10 concentration is not very significant.