Risk Management

Quantitative screens

Individual stock selection ideas are continually tested to ensure we only follow our most robust views. Using quantitative screens, fund managers are able to refine analysts’ recommendations by defining the critical areas that add value in a particular market or sector.

Customised quantitative screens break down the historic behaviour of markets to determine how stocks with different characteristics (such as ‘quality’ or different measures of value) have performed in different markets and sectors. Stocks in the current universe are given an objective ranking according to how strongly they exhibit those characteristics that have driven returns in the past. If the objective ranking matches the analyst’s fundamental ranking, it reinforces our convictions. If not, it encourages the fund manager to review and challenge the analyst’s assumptions.

Portfolio construction

Schroders’ highly skilled fund managers, with an average of 14 years’ industry experience, are given scope to exercise flair and judgement within a controlled portfolio construction framework. We seek to meet clients’ performance requirements with the lowest level of risk, and the use of structured risk controls and the provision of risk management tools to our fund managers is inherent in our investment process.

We have developed a proprietary, interactive risk management software system: the Portfolio Risk Investment Strategy Manager (PRISM), which enables fund managers to monitor portfolios on a real-time basis. PRISM deconstructs any portfolio, attributing risk to stocks, sectors, countries and style. Its multi-dimensional approach to risk monitoring is extremely comprehensive and takes into account many measures of potential risk.

Our equity fund managers use PRISM to ensure the distribution of risk in portfolios reflects their convictions and that they understand all sources of risk and return. The system also provides a high-level check that an appropriate level of risk is being generated given the performance objective of the portfolio.

In our fixed income portfolios we quantify total risk relative to the benchmark, which provides an indication of how far the portfolio return could deviate from the benchmark return over a given period. We then break total risk down to understand how different investment decisions (duration, position on the yield curve, sector and individual security selection) contribute.

Investment Risk Group

At Schroders we have a dedicated Investment Risk Group (supported by a team of software developers) who are principally responsible for providing:

• Sophisticated and up to date investment risk tools that cover all asset classes therefore allowing our fund managers to know and understand the levels of investment risk inherent in their portfolios.
• Research insight into risk management trends, market behaviour, and the potential impact of these upon a fund manager’s portfolio.
• A point of independent oversight and review to ensure that the risks being taken within a given fund are appropriate and consistent with its risk and return profile.
  

For a detailed look at Schroders Investment Risk Group, our approach to risk and risk management information please download our Investment Risk Group document.