It is essential to have investment benchmarks and guidelines to enable both client and investment manager to assess the effectiveness of the investment strategy being pursued and the appropriateness of the investments in the client portfolio.
All client portfolios are therefore managed against agreed benchmarks and risk limits. In establishing the guidelines for a new fund, great attention is paid to the investment objective of the client, the level of return which can be achieved and the level of risk which can be tolerated. We assess risk at various different levels including the level of the individual security and at the overall portfolio level. The objective is to evaluate exactly what risks are being taken within a portfolio and to ensure that there are no surprises. A disciplined and rigorous risk management function ensures compliance with mandate guidelines whilst at the same time the investment process is sufficiently flexible to enable managers to react to change in the markets and analysis undergoes a process of continual enhancement to reflect new developments.
Portfolio risk is managed by use of tracking error, duration management, currency hedging and use of options, where permitted, to control market exposure.
Sources of outperformance:
- for bonds the following are sources of outperformance: allocation between different countries within the benchmark or guidelines, duration, curve positioning, security selection and switching opportunities. Where the mandate permits use of currency plays we also employ an active currency management policy.
- for equities we look to add value through stock selection, sector allocation and asset allocation. We also use derivatives and active currency management where permitted by the mandate.