Risk Management

Tailored Fixed-Income Solutions

Each portfolio is continually evaluated to ensure consistency with clients' investment objectives and risk tolerances.

"Risk management is fundamental to how we manage assets. It is a critical component of successful portfolio management. We integrate risk management inputs into the portfolio construction process to strengthen its effectiveness."

Ahmet Kocagil, PhD

Chief Risk Officer

Ahmet Kocagil, PhD

Chief Risk Officer

Aiming for Better Risk-Adjusted Returns for our Clients

As depicted in the graphic, portfolio construction is a balancing of risk and reward, and a team effort. Managing risk at Western Asset involves risk managers, portfolio managers, and client service executives, collaborating on behalf of our clients. We work together to obtain information about client risk tolerances and to construct portfolios that seek to achieve our clients' objectives while remaining within their specific tolerances.

Each Client Is Unique

After understanding and quantifying client objectives and risk tolerances, we look at current and potential risks to see that they are appropriately rewarded — higher reward conviction items should also be the higher risk items. We believe exposures that would lead to risk without reward should be eliminated or hedged when possible. During the portfolio construction process, we seek to align risk exposures so they are sized properly for each client's objectives and risk tolerances.

Independence and Transparency

Our risk management team manages investment risks and provides risk information to our portfolio management team while remaining independent. This allows the portfolio management team to be well informed while seeking superior risk/reward profiles in portfolio construction, at the same time this enables risk managers to conduct an independent escalation procedure if and when a departure from client risk tolerances is detected. Thus, risk management is an integral component of our investment process.

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A unique risk PLATFORM

WISER: The Benefits of a Proprietary Risk Platform

Western Asset employs an integrated approach to active risk management that uses our proprietary risk system, WISER, the Western Asset Information System for Estimating Risk. It was developed in house and benefits from the constant dialogue between risk managers and portfolio managers to provide comprehensive and powerful analysis and reporting. Derivative risks are evaluated via full valuation and market and credit risks are simultaneously estimated through Monte Carlo simulation of interest rate, spread and FX movement, and obligor default probabilities.

Market risk is addressed through limits on risk measures such as tracking error, volatility, value at risk (VaR), expected shortfall (ES), etc., and through scenario analysis and stress testing.
Credit risk is addressed through size limits, concentration limits and default sensitivities.
Counterparty and liquidity risk are addressed using models most suited for long-term investors.

Common Language

Our risk platform enables the adoption of a common risk language across the Firm

Consistency

Consistency of modeling framework and assumptions

Coverage

Coverage across a variety of asset classes and securities

Best in Class Modeling

Modeling cutting edge models that we can enhance as needed

Responsiveness

Ability to swiftly react to shifts in the market

Tailored

Customized to our clients' objectives

Western Asset's Risk Management & Quantitative Solutions Department has established a dedicated Sustainability Risk Research Team. The team developed several proprietary tools to manage climate-related risks, including climate-risk stress tests that measure both transition and physical risks for corporate issuers in different temperature anomaly scenarios. The team also created specialized optimizers, which we use to design Net Zero and Decarbonization pathways tailored to our clients' specific targets.

Risk Management: Thorough, Ongoing, Dynamic Communication

Risk Management, Investment Management and Client Service Teams communicate carefully, incisively and dynamically on a daily, weekly and monthly basis to assess and integrate information and relevant context as it emerges and evolves. The Firm's established escalation process involves a defined protocol that includes the notification and involvement of our most senior executives, including the heads of relevant departments as well as portfolio and risk managers.