The basic building blocks of risk reporting are the portfolio’s combined exposures to a set of pre-defined (in the case of Fundamental factor models) risk factors determined by each asset’s weight in the portfolio, the risk model describing their interaction, and ultimately their individual contributions to risk. When minor weights and minor contributions match, there is no need for deeper analysis. It’s not that these positions don’t matter—they do and many may be held for risk-minimization purposes—but reading in depth about them is… boring.
On the other hand, the revelation of large contributors to portfolio risk—especially those in direct contrast to their weight—is what makes risk analysis… exciting. Minor contributors with minor weights may not have hidden dimensions, but principal contributors are often not at heart what they seem to be at face. Uncovering their true nature and describing the deep characterization that gave them such influence lies at the heart of risk analysis (and frankly, what makes it worth reading).
Good reporting, like investigative journalism, should unearth the true influence of a portfolio’s unique exposures, telling that story in a way that conveys a total knowledge of its sources, and revealing actionable insights for decision-making. It requires the marriage of quantitative analysis and powerful storytelling in equal measure. Aristotle once observed that when storytelling goes bad, the result is decadence. Static reporting can lead to misunderstood risks and complacency.
At one end of risk reporting are pure facts of the tabular form; at the other end, pure fiction filled with confounding abstractions. Insightful reporting strikes a balance along this spectrum, describing and informing at the same time, taking us beyond what is to what could be, and sometimes turning presumed impossibilities into shocking probabilities in the process. Readers should be brought to a complete understanding of the relationship between sources of risk in the portfolio and its possible future return paths. But you must also have words that address the individual and get fast hold of his imagination so that each one who comes under their influence shall feel as if the story of her portfolio was completely known to the author and its investment thesis laid bare. The report should be a perfect metaphor that says: Your risk is like this!
So, for anyone tasked with this responsibility (and who wishes to retain a shred of respect from his own species), put as much care into your reporting as you do in your active management—no one’s imagination was ever vitally impressed by numbers, and the overly factual genre repels people instead of attracting them. Having a risk management platform that enables multiple views of risk along with the flexibility to dig deep into that relationship is essential to be able to tell the story of your portfolio and have a chance of converting any tempted creature. For a good example, sign up to Christoph Schon’s weekly MAC Monitor email.
The only thing that enhances a well written story even more are pictures. Ask your Axioma rep about our new dashboard capabilities and see how you can quickly add a thousand words to your reports. And remember, a purely descriptive report stays home, an insightful one travels.