Wednesday 31 January 2024 by Philip Brown a man reading from an ipad and having a cup of coffee Trade opportunities

The Benefits of a Portfolio Risk Review

To get the most out of bond investments it is necessary to review your portfolio periodically. While your FIIG relationship manager can help you with this at any time, each year a number of FIIG client portfolios receive a centrally generated, formal Portfolio Scorecard. With those annual scorecards having recently been sent, it’s timely to talk about how to get the most out of a portfolio review.


To ensure a bond portfolio still meets the owner’s investment objectives, it’s important the components of that portfolio are regularly reviewed. Over time, market conditions change and so too do the individual investors’ circumstances. Portfolios need to adjust to reflect both of these changes.

FIIG’s Investment Strategy Team conducts a yearly Portfolio Review for all FIIG clients with portfolios holding above $150,000, inclusive, across a minimum of five bonds. This annual in-depth review is in addition to the ongoing consideration and assessments carried out by the Relationship Manager across the year.

FIIG’s 2024 Portfolio Review measures key features of a bond portfolio with an eye on the main sources of risk to bonds, but for the first time, the review also looks at the expected returns too. As is often the case in investing, higher returns are usually only available if an investor is willing to accept higher risk. As such, a “lowest” risk rating is not necessarily good and nor is a “highest” risk rating necessarily bad. The key question is whether or not the risk and return features of your bond portfolio match your desired objectives. The intention is for FIIG investors to take considered risks and to receive the best return possible within that risk framework. FIIG is licenced to provide general financial advice only and as such our reviews do not take into consideration individual circumstances or risk profile.

The key risk measures in the report are Concentration, Currency risk, Modified duration, Sector exposure, and Sub-investment-grade holdings. Please note that the Portfolio Scorecard shows an individual portfolio’s score, alongside the average score for that measure from the investors in the FIIG client base with a similar portfolio.

Aligning with market moves and outlook

The Portfolio Review is conducted at the beginning of each year to ensure it is timely and relevant for the upcoming year. A portfolio constructed last year may have been perfect at the time but faces different market conditions and a changed outlook this year.

There can be missed opportunities, underperformance, and elevated risk if a fixed income portfolio isn’t periodically fine-tuned to reflect the change in macro themes and outlook.

This time last year, the RBA cash rate was 3.10% and the market was expecting an ongoing pattern of interest rate rises. As we sit at the start of 2024, the situation couldn’t be more different. As FIIG research discussed in their recent Macro Outlook for 2024 report, the RBA looks like it may have finished raising rates and the main unknown for 2024 is when will the rate cuts begin.

The 10-year Australian Commonwealth Government Bond (ACGB) yield had a very unsettled year in 2023. It traded as low as 3.18% and as high as 4.95% but actually closed 2023 very close to where it started.

Source:  FIIG Securities, Bloomberg

While periods of higher yields create opportunities to add longer-dated fixed investment grade bonds at more attractive entry points (remembering a change in interest rates and bond prices move in opposite directions), it’s important to review portfolios and identify overweight positions where valuations will be impacted.

Improving returns

Through reviewing portfolio construction, the overall return can be improved by adjusting individual positions and identifying opportunities.

The current market seems to have calmed a little. The prospects for continued RBA hikes have definitely faded. However, the main reason the RBA has finished seems to be that the economic “peak” has passed and the economy is likely to weaken in 2024. A weakening economy does normally mean lower yields and higher bond prices, but it also comes with a material increase in credit risk.

The key to improving returns in 2024 is likely to be taking careful positions in longer-duration bonds while ensuring you are not unintentionally increasing risks in other ways by becoming over-exposed to a particular name or a particular sector.

Managing risk

A regular portfolio review is a useful tool for identifying the level of risk (and type of risk) in a portfolio and adjusting the construction accordingly.

In the Portfolio Scorecard 2024, the first risk measure presented is Concentration risk. This measure shows the proportion of a portfolio (measured in dollars) that is represented by the largest 10% of holdings (measured in a number of bond lines). This measure captures how diversified or concentrated a bond portfolio is overall. A high score suggests that the overall portfolio is dominated by a small number of bonds.

Currency risk is the second measured item, but this only impacts portfolios with foreign exchange exposure. FIIG clients have access to bonds denominated in Euros, Pounds, and US dollars, which can carry exchange rate risk.

A portfolio review can help identify where there is too large an exposure to foreign-denominated bonds and hence carry a larger currency risk.

Modified duration is a measure of how long the bonds in the portfolio are. When bonds are long, the interest rates are effectively locked into the portfolio. But if market interest rates change, the market price of that bond can change. Since a change in interest rates affects all the investment between now and maturity, the longer there is until the maturity of the bond, the more a change in interest rate will change the price. Simply put, the higher the duration the more exposure the portfolio has to interest rate changes.

The final risk assessed in the portfolio scorecard is macroeconomic credit risk. This is spread across two measures. The first is sector concentration which, like the Concentration measure mentioned above, seeks to highlight diversification (or the lack of it) in the portfolio. But diversification isn’t just about owning bonds from different companies, it is about owning bonds with materially different exposures. Should there be another financial crisis, owning 10 different bank bonds would not really be effective diversification, even if it looked like it on paper. Sector diversification is a form of macro-economic credit risk, because the events that affect entire sectors tend to be larger and related to macro-economic events, rather than company management.

Certain sectors are inherently riskier than others and, importantly, different sectors withstand economic cycles differently. The Utilities and Infrastructure sectors are considered non-cyclical and more defensive sectors, whereas real estate and consumer discretionary are typically less resilient in downturns.

The final measure is sub-investment-grade holdings. “Investment-grade” here means the credit ratings assigned by the major international rating agencies (Moody’s/S&P/Fitch). These companies assign ratings based on the quality of the company with AAA being the highest and C being the lowest. The companies with ratings above BBB- are called “Investment-Grade” and generally have very low default risk.

Companies below this threshold are called “non-investment-grade” or “speculative grade”. These companies have higher risk and much higher default rates.

As the S&P chart above shows, the historical probability of default decreases the higher the credit quality and the shorter the duration. For example, an AAA-rated bond maturing in four years has a historical 0.24% rate of default compared to a B-rated bond maturing in 10 years with a 24.95% incidence.

Again, however, risk and return are intertwined. Unrated and sub-investment-grade bonds can be very effective ways to help a portfolio achieve a higher level of income. It is the size of the exposure that is important, and a review of the portfolio’s mix of investment-grade and sub-investment-grade bonds can help ascertain the level of credit risk.


It’s beneficial to regularly review fixed income investments to ensure they still match the intended risk and return profile of the investor. It is not that high-risk portfolios are intrinsically bad – these risky portfolios often come with the highest expected returns. The important point to consider is whether the investment risk profile matches what the investor wants it to be.

FIIG’s Investment Strategy Team conducts an annual review of client portfolios, in addition to continual monitoring of portfolios carried out throughout the year. The Portfolio Scorecards for 2024 have recently been distributed which makes it a great time for investors to consider the overall make up of their portfolios.