Active Risk Management: How Managers Can Improve Portfolio Performance

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Behind the Scenes of Fixed Income Portfolio Risk Analytics

Fixed Income Portfolio Analysis has long been one of FactSet's core areas of development, and the work in this area has been leveraged as a core building block for our multi-asset class risk solution. This presentation will provide background to the underlying process used to calculate the derived analytics required for the analysis of fixed income instruments and some examples of how these analytics are used in everything from portfolio exposure analysis to portfolio characteristics to performance attribution. Understanding this process and the resulting analytics is a necessary stepping stone to fully appreciate the mechanics of FactSet's approach to balanced risk.

The Market's Open: Do You Know Where Your Bets Are?

Active portfolio managers must make bets against their benchmarks to outperform. All too often, however, these bets are not quantified, or traded off against expected returns in any rigorous way. An even more serious problem arises from the fact that the deliberate bets in a portfolio — those the manager is making to generate the portfolio performance (and to demonstrate his or her skill) — are often swamped by the unintended bets in the portfolio. The true essence on investment management lies in managing the risks in a portfolio in a way that optimizes the bets the manager is trying to make, while minimizing all other sources of risk. This talk focuses on a short-term risk model that enables managers to analyze the risk structure of a portfolio over a relatively short horizon of up to one month. While different investors may well have different (and longer) investment horizons, they still need to trade from time to time to rebalance their portfolios. This model allows managers to see what bets they have in their portfolios in the current market conditions, which will enable them to rebalance more efficiently.

FactSet's Balanced Risk: Combining Equity and Fixed Income Jeopardy Measures

Real risk, wrote Ben Graham, is measured not by price fluctuations but by a loss of quality and earnings power through economic or management changes. But volatility has been the proxy for risk for many years now, in spite of Graham's concerns.  While we'll accept as fact these days that combining securities together in a portfolio by minimizing the variance of this measure creates a less risky portfolio, it's not clear necessarily how to measure across portfolios their relative risk to a benchmark. In this presentation we will discuss FactSet's novel approach to risk measures in balanced mandates consisting of stock and bond portfolios. In addition, we will show the usefulness of variance as a risk measure, when applied in appropriate ways to examine a portfolio, overcoming Graham's concerns and revealing how a portfolio may behave under differing market scenarios. Lastly, we illustrate the recipes necessary for just such analysis.

Case Studies in Risk Management

Most fund managers pay only lip service to risk management. People talk of risk monitoring or risk control, when all they really mean is checking that the risk or tracking error of their portfolio is within some prescribed range. At many large fund management organizations, the Risk group is part of the Performance group, which tells you that they regard "risk" as an ex post activity (like performance measurement); something to be done after the portfolio manager has completed his or her rebalancing. But Harry Markowitz's Nobel prize-winning idea was that risk should be taken into account as the portfolio was being rebalanced, to ensure that wherever there was a unit of risk, there was a unit of expected return to compensate; this is the true definition of an efficient portfolio. Active risk management can actually improve portfolio returns.  This talk describes a number of different cases where risk management has been successfully applied to improve the performance of live funds.

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