How portfolio managers deal with risks to optimise returns

My Bookmarksclose
You have no bookmarks currently
    How portfolio managers deal with risks
    How portfolio managers deal with risks
    28 September 2021

    Key Highlights

    • Risk is tied to the returns we aim to achieve and one of the measures of risks is volatility.
    • Take for instance how the various portfolios in UOBAM Invest for corporates performed, with the different risk levels, delivering 1-year returns of between 0.6% and 20.9% ranging from the "Very Conservative" to the "Very Aggressive" portfolio by 30 June 2021.1
    • The correlation between risk and returns is clear: the higher your risk appetite, the greater your potential returns or loss. In turn, you would have had to ride over waves of volatility at the higher levels of risk.

    Buying a brand-new car is a simple task. Pick a model, go for a test drive, then pay for it.

    You would expect the car to perform. But after a few days, the gearbox starts to act up. Or maybe the engine suddenly breaks down. There is a small chance that the car is a lemon.

    Risk is everywhere.

    There’s always a chance that nothing goes as planned. Random events are part of our daily lives that may be the result of our choices and decisions. Often the default mode is a tendency to view risk as negative which we can often avoid by not buying a second-hand car or not taking up a new job out of fear of the unknown.

    Not so in the financial world.

    When we decide to invest, we have to accept that risk is part of the equation: investing is inseparable from risks – it’s just what level of risk we choose to take.

    Risk is tied to the returns we aim to achieve and one of the measures of risks is volatility – when prices whipsaw either up or down from normal levels from time to time.

    Such swings can affect potential returns: the higher the volatility or risk, the higher the potential returns or loss.  For portfolio managers, juggling multiple risks for their clients on a daily basis is the norm. But there are ways to mitigate the risks, and this is how they do it.

    Approaching risk

    Portfolio managers handle billions of dollars and are charged with gauging the potential for gains and losses for their clients’ portfolios.

    As the person entrusted with someone else’s funds, they have to follow an investment mandate, which means achieving the customers’ desired objectives and working around certain parameters including risk levels and types of funds.

    For instance, fixed income management focuses on safer assets like government and corporate bonds. These pay out a set amount of money in the form of interest or dividends until the maturity date of the bonds.

    Fixed income fund managers typically look to generate returns from these low-risk instruments by analysing credit scores and term structures of interest rates. The onus is on them to watch out for interest rate changes, deteriorating credit and the impact of inflation that will affect yields.

    Such variables are taken into account when they invest in bond securities that can weather most storms – if one area of the portfolio dips, another higher performing segment will help to mitigate or offset the losses.

    Equity fund managers on the other hand can employ a range of different investment styles, from active and passive to growth and value. They track macroeconomic risks from official data and scrutinise companies for their outlook and performances.

    Take for instance how the various portfolios in UOBAM Invest for corporates performed, with the different risk levels, delivering 1-year returns of between 0.6% and 20.9% ranging from the "Very Conservative" to the "Very Aggressive" portfolio by 30 June 2021.1

    Investing as a professional career

    1Source: UOBAM. Performance from 1 July 2020 to 30 June 2021 in SGD terms, on a Net Asset Value basis, before fees. Past performance of the portfolio or UOBAM and any past performance, prediction, projection or forecast on the economy or markets are not necessarily indicative of the future or likely performance of the portfolio or UOBAM.

    The correlation between risk and returns is clear: the higher your risk appetite, the greater your potential returns or loss. In turn, you would have had to ride over waves of volatility at the higher levels of risk.

    Investing as a professional career

    Source: UOBAM, 30 June 2021.

    Such close scrutiny is necessary to avoid the pitfalls that come with higher risks. Black swan events like the pandemic can pummel markets, while disruption and rotational plays can wipe out previous gains.

    That is why it is important for portfolio managers to continually scan the environment for emerging risks. They also gather information from research analysts to help them shape their decisions on whether to shift their funds or to hold on to an investment.

    If it sounds like a lot of work, it is!

    UOBAM’s portfolio managers are constantly reading, analysing and talking to the industry to keep abreast of the key issues.

    But it is also what gives them huge pride in the work they do, as their first priority will always be you. After all, at UOBAM, we believe in doing right by our customers.

    If you are looking for a fuss-free way to invest, check out UOBAM Invest, which will automatically let you know your risk profile and create a unique investment solution that is tailored to your goals and needs.

    Robot-investing, your way

     

    This document is for your general information only. It does not constitute investment advice, recommendation or an offer or solicitation to deal in Exchange Traded Funds (“ETFs”) or in units in any Unit Trusts (“Unit Trusts”, ETFs and Unit Trusts shall together be referred to as “Fund(s)”) nor does it constitute any offer to take part in any particular trading or investment strategy. This document was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. The information is based on certain assumptions, information and conditions available as at the date of this document and may be subject to change at any time without notice. If any information herein becomes inaccurate or out of date, we are not obliged to update it. No representation or promise as to the performance of the Fund or the return on your investment is made. Past performance of any Fund or UOB Asset Management Ltd (“UOBAM”) and any past performance, prediction, projection or forecast of the economic trends or securities market are not necessarily indicative of the future or likely performance of the Fund or UOBAM. The value of any Fund and the income from them, if any, may fall as well as rise, and may have high volatility due to the investment policies and/or portfolio management techniques employed by the Fund. Investments in any Fund involve risks, including the possible loss of the principal amount invested, and are not obligations of, deposits in, or guaranteed or insured by United Overseas Bank Limited (“UOB”), UOBAM, or any of their subsidiary, associate or affiliate (“UOB Group”) or distributors of the Fund. Market conditions may limit the ability of the platform to trade and investments in non-Singapore markets may be subject to exchange rate fluctuations. The Fund may use or invest in financial derivative instruments and you should be aware of the risks associated with investments in financial derivative instruments which are described in the respective Fund’s prospectus. The UOB Group may have interests in the Funds and may also perform or seek to perform brokering and other investment or securities-related services for the Fund. Investors should read the Fund’s prospectus, which is available and may be obtained from UOBAM or any of its appointed agents or distributors, before investing. You may wish to seek advice from a financial adviser before making a commitment to invest in any Funds, and in the event that you choose not to do so, you should consider carefully whether the Fund is suitable for you. Any reference to any specific country, financial product or asset class is used for illustration or information purposes only and you should not rely on it for any purpose. We will not be responsible for any loss or damage arising directly or indirectly in connection with, or as a result of, any person acting on any information provided in this document. Services offered by UOBAM Invest are subject to the UOBAM Invest Terms and Conditions.