How Axioma factor risk models revealed small cap alpha that traditional benchmarks missed

As Investment Analyst at J O Hambro Capital Management, Jack Gater conducts detailed performance analysis to support the firm's portfolio managers. His research directly informs investment strategies and helps validate the effectiveness of active management decisions. In this interview, Jack explains how Axioma factor-based attribution revealed surprising insights about UK small cap performance that traditional index analysis completely missed.

Uncovering the truth behind performance numbers

When index returns tell a misleading story

"What was quite interesting, was over the particular period that I was looking at our strategy, according to the Axioma risk model, it had performed very well from the small and mid-cap names held within that strategy," Gater explains. But when cross-checking against standard benchmarks, "there was no outperformance whatsoever. So you've got the index return saying one thing, and you have the Axioma UK risk model telling a very different story."

Risk-based attribution reveals hidden factors

"So the next thing that I did was I ran a risk-based attribution between the small cap index and the FTSE 100. And what it revealed is that the small cap index had performed very well over that period from its pure small cap exposure, while the index had suffered from its exposure to investment trusts," Gater explains.

Validating true alpha generation

"Tying this back into the Axioma risk model, I think this was clear why it was showing that the small cap exposure in the fund had performed so well over that period. Because if I actually removed the investment trust from the small cap index, that index outperformed the FTSE 100 quite significantly," Gater notes, confirming that J O Hambro's strategy was generating genuine small cap alpha.

"So for us, that was a very useful finding not only giving us more insight, but helping our fund managers make more informed investment decisions," Gater adds.

The impact

Through Axioma's factor analysis, J O Hambro can now distinguish between genuine alpha and market structure effects, enabling portfolio managers to accurately assess true strategy performance and avoid false conclusions about investment effectiveness. This precision ensures client portfolios benefit from validated alpha-generating strategies rather than being misled by index composition distortions.