Some Manage Portfolio Risk by Trusting “Magic”; We Do It (With) WISER!

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Western Asset firmly believes that a strong risk management culture is fundamental to a successful investment management record. As Benjamin Graham once said, “the essence of investment management is the management of risks, not the management of returns.”

Investment is about taking calculated risks. Investment teams need to have a good understanding of the drivers of their portfolio risks, so that they can weigh the alpha themes they come up with against the related potential risks. For ideal portfolio construction and management, investors need to examine both the center of distribution risks, e.g., tracking error standard deviation (TE), volatility ratio (VR), etc., as well as portfolio tail-risks, e.g., value-at-risk (VaR), expected shortfall (ES), and stress and scenario testing.

Acknowledging the strategic importance of a sound and independent risk platform, Western Asset has developed our own proprietary risk system called WISER, which we began using in 2016.

WISER—the Western Information System for Estimating Risk—is a single risk system for all Western Asset portfolio and benchmark securities/constituents. The system supports leveraging best-of-breed security valuation models under a single risk umbrella to ensure consistent assumptions across models.

WISER provides four primary benefits:

Independence: WISER analytics are based on and reflect Western Asset’s knowledge base and analysis of market conditions. Thus, they allow us to make our own decisions and assessments rather than following someone else’s.
Quality: WISER offers accurate and high-quality risk analytics for use by:
a) Risk managers and analysts to assess and dissect portfolio risk and analyze its drivers
b) Portfolio managers, traders and analysts to enhance risk-adjusted decision making
c) Client Service Executives to conduct more complete risk discussions with clients
Quantity: WISER analyzes vast and comprehensive data sets.
a) WISER currently covers virtually all fixed-income markets globally. In addition, later this year WISER coverage will also include global equities, as well as alternative assets. By June 2019, WISER will be equipped to cover virtually all capital markets
b) WISER allows portfolios that Western Asset manages to be analyzed every day and can be easily scaled to handle more (e.g., model portfolios, client portfolios, etc.)
Communication: WISER provides a lingua franca so that:
a) Portfolio managers, traders and analysts can put Western Asset’s knowledge into risk analysis, to thereby increase buy-in
b) Client Service Executives and product managers can obtain and share information in a way that helps clients see that their risk tolerances are being taken into account

WISER is a risk-factor-based model (with approximately 1,000 risk factors) that employs GARCH estimates in making forward-looking assessments for each factor. It provides parametric statistics (e.g., option-adjusted duration/key rate durations, option-adjusted spread duration, convexity, various yields and other Greeks), as well as distributional statistics on portfolios examined (via Monte Carlo), such as: TE, Vol, VR, VaR, expected shortfall, rho, beta and others.

In addition, WISER conducts a number of scenario tests to better examine the tail-risk sensitivities of portfolios. The reports generated show breakdowns of these metrics by risk factors, sectors, countries, currencies, security types and obligors so that we can drill down and analyze the risk drivers in a given portfolio. A schematic overview of WISER can be depicted as shown here:

WISER can also be used interactively to assist with the decision-making process. Namely, users can:

Conduct “what if” analyses to see the risk and return impact of particular trades (at the CUSIP level) in a given portfolio
Assess potential risk impacts of asset reallocation in a given portfolio
Examine the capital efficiency (a la Solvency II) of trade ideas
Conduct custom scenario/stress-test analyses
Decompose the total risk change into active position changes versus passive market changes

Thus, the WISER risk analytics platform, with all of its reporting and on-demand capabilities, helps us at Western Asset to gain timely insight and foresight in risk managing our portfolios/funds, addressing client queries and providing better risk-adjusted investments for our clients.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").

Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.

These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.

Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.

Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.

Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.

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Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.