Tag Archives: brian-haskin

Evaluating Enterprise Risk For Alternative Investments

Enterprise risk includes all of the factors that can affect an enterprise: market factors, reputation, regulation, compliance, operations, and legal risk are among the most prominent. Enterprise risk analysis , which uses stress tests and scenario assessments to estimate investment risks across asset classes, has become increasing popular with institutional investors, who understand the impact enterprise risk can have on their portfolios. But while enterprise risk analysis works well with traditional asset classes, using enterprise risk analysis on alternatives – such as hedge funds, private equity, and real estate – presents challenges. This, at least, is the view of BNY Mellon (NYSE: BK ) and affiliate HedgeMark, as articulated in their January 2016 white paper Considering the Alternatives: A Practical Look at Enterprise Risk Analysis and Alternative Investments . The paper explores the impact of incorporating alternative investments into enterprise risk analysis and looks at how different approaches to data management can impact the resulting conclusions. Evaluating Risk Across the Portfolio “With a sharper focus on risk by regulators and other stakeholders, many institutional investors seek a fuller picture of how risk operates across investments within an entire portfolio,” said Frances Barney, head of Consulting-Americas for Global Risk Solutions at BNY Mellon, in a recent announcement. “Data is getting more and more critical and investors need to be informed and comfortable with the assumptions of their risk assessment, otherwise, they can come out of it with a false sense of security about their portfolio.” The paper’s key findings and insights into best practices include: A “granular approach” to risk evaluation is preferable, with position-level information for all asset classes “the gold standard.” This kind of position-level transparency, liquidity, and control may be available in dedicated managed accounts and liquid alts, as well as traditional hedge funds. Information accuracy is obviously important, and that’s why the paper argues for single-vendor sourcing of investment data. Using a single vendor promises uniform data, whereas drawing data from multiple sources increases the likelihood of errors. Different approaches to data management can lead to different conclusions about risk. Having a different approach for each asset class can be problematic, which is why many firms are establishing a Chief Risk Officer position to evaluate risks across all asset classes. Consistency is especially important in light of the regulatory environment. Some regulators already require reports on stress testing and scenario analysis, through Form PF for U.S. investment advisers to hedge funds; and pursuant to Solvency II for insurance companies, and UCITS for European investment funds. “We’ve learned the most crucial component is the veracity of the underlying data, which becomes even more important and difficult to manage as more opaque assets are held in the portfolio,” said Ms. Barney. Jason Seagraves contributed to this article.

Using Active Share To Evaluate High-Yield Bond Portfolios

There are two chief ways of measuring a portfolio’s deviation from its benchmark: tracking error and active share. The first, tracking error , is the older and more traditional. It gauges a portfolio’s performance deviation from a benchmark return over time – essentially telling an investor how different the returns are from the benchmark. The second, active share , is newer but steadily gaining steam. It specifically measures how unique a portfolio is, at the holdings level, relative to the benchmark. Tracking Error vs Active Share Of the two, which is best? That’s the question MFS Fixed Income Portfolio Manager David Cole, Chief Risk Officer Joseph Flaherty, and Quantitative Research Analyst Sean Cameron set out to answer in an October 2015 white paper Active Share: A valuable risk measure for high-yield portfolios . As evident from the title, the trio values active share – but not exclusively. While active share can be an alternative to tracking error, one can complement the other, particularly in measuring the relative risk of a high-yield bond portfolio, which is the subject of the paper. Their findings: Active managers are increasingly being asked to demonstrate just how active they really are. Active share is the best measure for making this determination, since it looks at portfolios on the holdings level, whereas tracking error merely shows deviation of performance. Both can be useful, but tracking error is more a proxy for “systematic factor exposure,” whereas active share provides “valuable information on the degree of conviction,” according to the paper’s authors. As stated earlier, active share and tracking error can be used together, and this is especially useful in classifying high-yield bond portfolio managers. Using both measures allows investors to gauge a manager’s “activeness” and determine the sources of that activeness. According to the authors, “relatively high active share in combination with relatively low tracking error would be consistent with an active, diversified, high-yield credit manager.” Portfolio Insights Active share has typically been used in evaluating equity portfolios, but Cole, Flaherty, and Cameron show its usefulness-sometimes in conjunction with tracking error-in assessing high-yield bond portfolios, too. Active share in particular can give investors insight into the drivers of risk and return in credit-oriented fixed-income portfolios, which may have low tracking error but are actually quite active. “This,” according to the authors, “is consistent with a high-yield manager’s investment process, which frequently entails minimizing systematic risk while seeking to maximize returns from the security selection process.”

Franklin Templeton To Jump Into Smart Beta ETF Jungle

With just one ETF currently in the market, Franklin Templeton looks to make a bigger splash with a new range of equity ETFs. The company recently filed paperwork with the Securities and Exchange Commission (“SEC”) effectively announcing the firm’s plan to launch a quartet of smart-beta ETFs. Each of the funds in the LibertyQ series will track custom, rules-based indices calculated by MSCI. The four ETFs slated for release are: Franklin LibertyQ International Equity Hedged ETF Franklin LibertyQ Emerging Markets ETF Franklin LibertyQ Global Dividend ETF Franklin LibertyQ Global Equity ETF Multi-Factor Weighting All four ETFs are “multi-factor,” each with a different focus ranging from currency-hedging to dividend-themed. Instead of market cap, investments within the funds will be weighted according to a mix of quality, value, momentum, and low volatility. The Franklin LibertyQ International Equity Hedged ETF will invest in qualifying large- and mid-cap stocks from Europe, Australasia and the Far East, with no individual stock accounting for more than 2% of the fund’s total assets. The fund’s goal is to provide superior risk-adjusted returns compared to the MSCI EAFE (“Europe, Australasia, and the Far East”) Index, which is cap-weighted. The new Emerging Markets ETF is somewhat similar, but with holdings culled from the MSCI Emerging Markets Index. Unlike the International Equity Hedged ETF, though, the Emerging Markets version is not currency-hedged, and its holdings may be more highly concentrated in individual countries, sectors, and individual holdings. Franklin’s new LibertyQ Global Dividend and Global Equity ETFs also follow customized MSCI indices, with the former boasting a dividend theme while the latter seeks to outdo the risk-adjusted performance of the MSCI ACWI (“All Country World Index”). Industry-Wide Movement Barron’s reports that a Franklin Templeton spokesperson wouldn’t offer comment beyond what’s in the SEC filing, but CEO Gregory Johnson said “our intention is to enter the marketplace with smart beta ETFs and rule-based ETFs” back in June, in a post-earnings call with analysts . In doing so, Franklin Templeton joins Legg Mason, John Hancock, and Goldman Sachs as recent boarders to the smart-beta bandwagon. Management fees and ticker symbols for the new funds were not included in the filing.