by Ian Lumb
Ten years ago, a cutting-edge risk report would be delivered as a PDF of Excel, with 40-plus pages of aggregations, exposures, sensitivities, analytics and risk output in multiple dimensions. In many cases, risk data would be trapped in multiple reports—sometimes from different systems by asset class. Most risk managers, portfolio managers and clients would pore over hard copies of these data-dense, chart-light documents for some story, signal, outlier or breach of limits. All clients would get the same format reports without any customization for what was actually held in the portfolio or style of investment. If the portfolios were not complete, if analytics were missing, or if anything failed, a lengthy re-run was required. In other words, wait until tomorrow and hope for the best.
Today, unfortunately, some of this still holds true.
My portfolios are different, treat them differently
The good news is that over the last 10 years, technology for generating analytics and rendering output has become more far more responsive and customizable. Bespoke flat files, aggregations and reports are all a reality. However, while such reports are more tailored and useful, they remain static and driven more by vendor capabilities than investor requirements.
Surfing the BI (Business Intelligence) wave
In reality, investors and clients want to be able to slice their portfolios in any dimension that makes sense, interactively and on-the-fly. Risk reports need to be responsive, and to show risk and exposures over time. Ideally, this means measuring risk budgets, checking limits and measuring returns based on the investment decisions taken. This should all be available in a user-friendly interface, which does not require a PhD to run or understand, and can be given directly to clients to run on a tablet, phone or any modern web browser.
Usage of BI tools is exploding across many enterprises but hasn’t yet gone mainstream in portfolio risk reporting for a number of reasons. These interactive reporting tools are great for slicing and dicing funds in additive dimensions: weights, contributions and sensitivities. But many risk and performance analytics are not additive due to correlation, diversification and interaction effects. Axioma has solved this through smart use of interactive reporting, linked to a cloud-based analytics data warehouse with the ability to trigger focused calculations where necessary. In this way, the best-of-both models can be applied—flexible, interactive visualization AND performant representation of risk and aggregation nodes.
Leveraging the data
Storing pre-computed data to power visualization unlocks far more functionality than just interactive visualization. Historical views of risk and portfolio statistics over time are trivial. Having the data store independent of the calculation engine means that multiple sets of data can be co-mingled to create a single, powerful and consistent view of portfolios under management.
Consistency, consistency
The one thing clients and regulators get upset about the most is when a manager says one thing and does another. If there is a house view that telecoms are going up, why is the firm long telcos for one client and short for another? For any manager of multiple client funds, being able to visualize risk across multiple portfolios is key to revealing where their investment biases are, whether they are consistent and how they have changed over time.
Why has my risk changed?
Storage of historical data enables more advanced risk attribution. “Why has my risk changed?” is probably the most common question risk analysts face. Answering it is multi-faceted and requires knowledge of changes in weights, exposures, sensitivities, volatilities and correlations. Storing and enabling analysis of historical derived risk data opens up new possibilities in risk reporting focused on ‘point-in-time’ statistics. Previously, this required costly investments in data storage, manual work to extract data from different sources, or slow on-the-fly calculation of historical risk over time.
Different lenses, looking up and down, forwards and backwards
Effective risk analysis is not about generating one number or one slice of a portfolio. It is being able to construct a view that mirrors the investment process, highlights risk, detrimental outcomes, explains changes and gives confidence in the numbers. More than anything, having a modern risk visualization means being able in one place to look across portfolios, to deep-dive into the investments and glean information quickly to drive better decision-making.
Interactive reporting is here now, and here to stay, especially when paired with a cloud-based analytics store and calculation infrastructure. Maybe now investors can look in their rear-view mirrors and windscreens simultaneously, and have any investment metric they care to measure at hand—without having to wade through 100 pages.
Speak to Axioma about their flexible cloud-based interactive reporting. The future’s here.
