By Barb Shegog
A solution fully integrated with the Bloomberg Professional service can provide unparalleled access to the broad range of sophisticated tools required by investment managers—at no additional cost.
The credit crisis reinforced the need to vigilantly monitor risk and compliance in addition to the traditional measures for performance. Insight and transparency around a firm’s investments provides not only a level of confidence in the investment program but also provides protection for the organization. The challenges have never been greater as corporations demand more detailed compliance and risk reporting.
Meanwhile, many practitioners are discovering that several analytic systems are not up to the task. In trying to get an understanding of the portfolio data and understand the risk within investors have been forced to build “proprietary analytic systems,” also know as Microsoft Excel spreadsheets. The appeal of Excel is that one can download data and manipulate it or combine data from multiple systems.
However, this approach is full of flaws, the most glaring of which is the manual nature of the process that is both labor intensive and subject to user error. But a new analytic option might be available right before your eyes; and it may be less expensive than you think.
Consider Bloomberg
That option is Bloomberg’s PORT system. The strongest reason for giving it a try is the system’s familiarity. Most companies currently are probably using a “Bloomberg terminal,” as they were once called, for research, trading, compliance, or general market color.
The Bloomberg Portfolio & Risk Analytic or PORT solution is fully integrated with the Bloomberg Professional service—at no additional fee—providing unparalleled access to the broad range of sophisticated tools required by investment managers. What to consider when looking at a system? And how does Bloomberg PORT meet the criteria?
It is important to consider the following when evaluating a system: 1) data must transfer in easily, 2) provide accurate characteristics, and 3) it should gather data in a meaningful format so that you truly understand what risks are in the portfolio.
Data Transfer
First and most important data has to arrive easily and accurately into the system. Data transfer is important but equally important are the results. Long lists of reconciling items or issues not supported leads back to the labor-intensive process. Data can enter PORT in a variety of ways; the most common is a direct feed from the custodian. Several custodians have these feeds already built and the link can be established quickly and easily. Many use Bloomberg as a trading or compliance platform; if this is the case, information can be directly fed into the analytic system. What could be easier? The security level detail appears to be up to the task.
“Active risk management systems are getting more sophisticated each year and more useful within our investment process,”—Robert Sweeney, Portfolio Manager, Eaton Vance
One Bloomberg PORT user mentioned that he has been pleased with the security level detail; after his recent import of data into PORT, only 8 of the 3400 securities imported were not already in the Bloomberg database. Securities not already held in the database and modeled have to be manually set up by the user. Currently CMO’s and preferred issues are not modeled but Bloomberg expects that these issues will be added by the end of the year.
Reliable and Trustworthy
Secondly, the characteristics of the security have to be accurate, for example, the models must produce characteristics that are reasonable. A system is only as good as the underlying model generating the securities’ characteristics. Accurate characteristics provide greater clarity to the investment decision making process and give you confidence to use the system. Bloomberg has invested a significant amount of time and capital developing models to give users confidence in the numbers reported by the system.
Many systems have a proven track record with simple fixed income securities however; Bloomberg’s PORT system also includes, money market issues, convertible securities, corporates, and structured products. Many systems do not have accurate characteristics for these instruments, or use more generic cash for money market instruments. A benefit of Bloomberg’s single platform model is that not only does the system have the holdings and risk analytics, it also has the market and security data in the same system, thus streamlining the workflow.
Measuring the Now not enough
Reviewing portfolio characteristics is essential for understanding the risk in the portfolio today. However, to accurately measure risk and have full transparency into the portfolio, a system needs to
provide more than the present.
Robert Sweeney, portfolio manager at Eaton Vance, says the goal of an active risk management program is to estimate ex-ante or forward-looking risk “at both the portfolio level and sub-portfolio level, such as sector.”
“You can accomplish this using a multifactor risk model, which is based on the principle that a security’s return is driven by a set of common factors,” Mr. Sweeney says. “These models are designed to deconstruct the essence of what comprises each security’s volatility into common factors. Ex-ante risk then depends on exposure to these factors and how volatile and correlated they are.” From performance and performance attribution to advanced risk characteristics, PORT provides you with a vast array of choices, past, present, and future.
Never forget the past
An excellent way in which to measure how risk in the portfolio has been rewarded in the past is to review performance attribution.
Here the goal is to gain insight into the drivers of historical risk and performance. PORT will allow you to easily identify the sectors or holdings that have exhibited the best risk/return trade off and how this performance compares with your portfolio’s benchmark. Analyze relative performance results by examining factors including curve effect, security selection effect, allocation effect, and currency effect.
Ideally a system can also produce returns over a flexible timeframe for those that might not be on a standard fiscal calendar.
What does the future hold?
Advanced analytics are needed to help manage and measure market-related risk exposures and give the investor insight into how the portfolio might behave in the future. Stress tests, scenario analysis, tracking error and absolute/relative value-at-risk or VaR, are examples of such measures.
While PORT does not deliver a genie in a bottle with predictions of the future it does help you provide the answers to those “what if” questions. Bloomberg PORT allows you to evaluate the portfolio using a variety of historical stress scenarios, such as the global financial meltdown in 2008 or you can create custom scenarios. If your corporation is sensitive to a particular scenario, for example rising euro rates, the scenario can be customized.
Tracking errors is another useful tool that can be used to understand the amount and sources of risk to which the portfolio is exposed. Using PORT you can analyze the portfolios ex-ante (predicted) risk by using one of Bloomberg’s multi-factor risk models.
Delivered in One Neat Package
In a perfect world all reports are in an easy -to-assemble format with little manual intervention. It’s understood that most users currently—and will continue to—cobble together several reports to produce their desire risk report. The data can be displayed in tables, historical charts and heat maps. Bloomberg is working on improving the reporting function. For those of you that cannot get enough, PORT allows you to view portfolios on many mobile devices.
While everyone may be wishing and hoping for the system that does it all (along with one that predicts the future), they would be better served by making sure the data going into the system is of sound quality.
“Active risk management systems are getting more sophisticated each year and more useful within our investment process,” says Eaton Vance’s Mr. Sweeney. “It is important to stress however that these systems require considerable assumptions and are only as good as the underlying data.”
Still Bloomberg PORT might be a logical next step for those practitioners who have the sound data but have found their analytics capabilities lacking.
And since many companies already have a Bloomberg, the PORT function warrants consideration.