Wednesday 27 January 2021 by Jonathan Sheridan Portfolio-Risk-Review-800 General

Understanding your Portfolio Risk Review

One of the advantages of being a client of FIIG is that there is a lot of information and extra support available compared to investors who are not clients.

Examples include detailed Research reports, our weekly insights newsletter – Smart Income, and the subject of this article, the annual Portfolio Risk Review.

Annually we conduct an analysis of each portfolio in our custody and present an individual report to each client detailing a number of risk measures that we feel are important for understanding the risk contained within their fixed income portfolio held at FIIG.

The review distils the analysis into a single measure as a first step, then expands into the relevant categories. The front page looks like the below:


The review goes on to detail the particular credit risk (via ratings for wholesale clients), currency risk and security type metrics, followed by a list of large holdings and then a line by line summary of the whole portfolio.

The entirety of the portfolio is analysed by a number of metrics (not an exhaustive list) that we consider important in assessing the overall risk of the portfolio, and then weights those in a matrix of importance to derive the overall Portfolio Risk Rating shown above.

Each metric has a High, Medium or Low threshold and then a weighting to decide how much impact the individual metric has on the overall portfolio rating.

For example, the most volatile aspects of the portfolio are typically valuation in high yield bonds and currency fluctuation. Therefore, these two metrics have the highest weighting to the overall rating considering their impact on portfolio valuation.

The metrics used as shown above in the table are explained in more detail below:

  • Sub Investment Grade rating exposure – credit risk is usually the most important driver of whether capital and income is paid as expected, and a sub investment grade credit rating indicates a higher credit risk. This is particularly important as investors search for yield in this low rate environment. This is measured as the proportion of the portfolio in sub investment grade rated bonds.
  • Diversification – the best way to spread risk, by spreading your investments over a larger number of individual bonds. This is measured as the percentage of the portfolio held in a single bond.
  • Security type – examines the different coupon styles of the bonds held based on their likely volatility to movements in interest rates. As fixed coupon bonds have the highest price volatility given a particular movement in yield, this is measured as a proportion of the portfolio held in fixed coupon bonds.
  • Currency – movements in currency can affect the value of capital and income from non-AUD denominated bonds as distinct from the price or income level of the bond itself. This is measured as the proportion of the portfolio in non-AUD bonds.
  • Maturity profile – bonds all maturing within a short time of each other introduces market and reinvestment risk. Maturities should therefore be spread over a number of different years. This is measured as the proportion of bonds maturing in the same calendar year.
  • Sector – individual sectors may experience volatility due to specific risks affecting only that sector, and therefore diversity of sector is desirable. This is measured as the highest proportion of the portfolio exposed to one particular sector.

The Portfolio Risk Review is not designed to be a comprehensive review of an investor’s portfolio but rather an indication of where we believe the risks in each portfolio lie and how that impacts the portfolio overall.

As one of the key pieces of information produced only for clients in the year, it is a great place to check in with the portfolio and start a detailed review at the beginning of a calendar year and make sure the risks in your portfolio are understood and therefore performance given market movements in the future are more likely to be understood and prepared for.