Portfolio construction is a balancing of risk and reward, so risk management is an integral part of portfolio management. Risk management at Western Asset is a team effort involving client service executives, risk managers, and portfolio managers. These groups work together to obtain information about client risk tolerances and to construct portfolios intended to achieve the client's objectives while remaining within these tolerances.
The circular graphic on the right represents the Firm’s investment risk management process. After understanding and quantifying client objectives and risk tolerances, Western Asset analyzes risks in portfolios—both those in place as well as potential portfolios that might be put in place. Western Asset then looks at the risks to see that they are appropriately rewarded—higher reward conviction items should also be the higher risk items. Exposures that lead to risk without reward should be eliminated or hedged when possible. Finally Western Asset seeks to align risk exposures so they are sized properly for the client's objectives and risk tolerances.
Western Asset's process also comprises monitoring of investment risks by the Risk Management Team, which is independent of the Portfolio Management Team. While the risk management group works closely with the portfolio management group to provide risk information for use in superior risk/reward portfolio construction, there is also an escalation procedure when it appears to the risk managers that portfolios might be departing from client risk tolerances.