Western Asset has a dedicated risk management team that oversees risk management and incorporates it into the investment process. While this team is integrated into the portfolio management process, it is independent of the portfolio management team and has a separate reporting structure.
Western Asset's risk management team combines the best of the Firm's technology and experience to develop useful risk management tools and analysis. These methods provide information on daily, weekly, monthly and quarterly periodicities to key groups at Western Asset, including client service and clients; portfolio managers; risk managers; and senior business managers.
Third-Party and Custom Systems
Western Asset uses a wide variety of third-party and internally developed systems to enhance its quantitative research capabilities. These systems also provide comprehensive portfolio and security analyses on an individual account level and across accounts. This enhances the level of detail and the number of tools with which Western Asset manages portfolios. Despite using a large number of independent models to evaluate the risk of different portfolios, the Firm understands that quantitative models are only as good as the assumptions on which they are based. Therefore, the high-quality analysis and observation that come with experience are applied to all model output, increasing the usefulness of the data.
Evaluating Risk
Western Asset portfolio managers use a variety of methods to evaluate risk in client portfolios and in prospective strategies. These methods are aimed at three kinds of alignment: alignment of each portfolio with its client's risk tolerance; alignment of risk and reward themes; and alignment of structure across portfolios with similar guidelines and benchmarks. Daily analyses show key rate durations; sector spread durations; convexities; yields; exposures to currencies; and other security analytics aggregated across portfolios and sections of portfolios. Other analyses show overall portfolio risk estimated by risk models that take into account the expected relationships between segments of the portfolio.
Continual Risk Analysis
Western Asset performs risk analyses throughout the trading day. These analyses occur across multiple global offices and cover sector and subsector concentrations; risk factor exposures; and key rate durations. The Firm uses a comprehensive set of vendor and proprietary risk systems to estimate top-down portfolio risks using a wide variety of metrics such as tracking error; expected shortfall; and value-at-risk. While sophisticated quantitative models provide valuable information in normal market conditions, Western Asset also focuses on tail-risk behavior via stress testing, scenario analysis and drawdown analysis.
