Investors have a justifiably complicated relationship with risk. The top risk contributors are the primary generators of potential returns, yet represent the greatest portfolio vulnerabilities.
Managing risk is integral to successful portfolio management, but risks, especially at the portfolio level, are difficult to observe.
To manage risk, investors need a reliable tool that provides deep insights into their equity portfolios’ risk exposures.
How is your investment manager “spending” your portfolio’s risk budget? Is your investment manager pursuing a strategy “true to label?" And, how does your manager’s strategy complement or replicate other strategies?
The Risk Lens
Risk Lens is an online risk analysis tool provided by Causeway Analytics and Causeway Capital Management LLC. It can be used by an investor to confirm, or refute, that managers are indeed pursuing the strategy advertised. It can allow the investor to determine the relative magnitude of portfolio risks and identify potential sources of excessive concentration.
These analytics are effective in highlighting similarities and differences among multiple portfolios, permitting investors to make timely assessments of which portfolios best complement each other and which are the closest substitutes. Risk Lens is also useful in forecasting the management regimes in which a strategy may succeed or underperform.
Available as an interactive web-based application, investors can use Risk Lens to run multiple analyses of funds at their convenience.
Risk Lens illuminates a manager’s active risks by factor category. How is a manager spending its risk budget? For example, is your manager taking excessive currency risk, trying to time market beta, or focusing on stock selection? Ultimately, the composition of active risk should align with your manager's skill set.
Risk Lens examines and compares your managers’ portfolio style, country, sector, and environmental, social and governance (ESG) tilts. Are managers investing “true to label” or have they strayed from their mandates? Risk Lens also analyzes how a manager’s risk profile may change in different regimes to reveal vulnerabilities to changing market conditions.
Identify the best manager complements and substitutes using forward-looking active return correlations. How similar are managers’ risk exposures? And how do the predictions compare with historical realized alphas? Are two portfolios replicating the same risk/return profile, or do their risk exposures diversify each other if paired together?
| Portfolio A | Portfolio B | Portfolio C | Portfolio D | |
|---|---|---|---|---|
| Portfolio A |
*
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| Portfolio B |
-0.2
|
*
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| Portfolio C |
0.4
|
0.2
|
*
|
Predicted Alpha
Correlation |
| Portfolio D |
0.1
|
0.5
|
0.2
|
*
|
|
Identify the best complements and substitutes using predicted active return correlations.
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We start by identifying systematic sources of risk. All multi-factor risk models involve analyzing factor returns, a portfolio’s risk exposures and the returns attributable to these risks. Our proprietary risk model includes factor categories and idiosyncratic risks not captured by the common factor categories.
Once we know the weight of all positions in a portfolio, we can aggregate the risk factors of individual stocks across the entire portfolio. From there, we can examine the contributions of individual stocks, factors, and factor groups to total volatility and tracking error (volatility relative to a benchmark).
Over our 18-year history managing equities, Causeway has relied on our in-house quantitative capabilities to augment our investment research. As longstanding members of our research team, our quantitative analysts provide an incisive, nuanced understanding of portfolio risk that is integral to the equity strategies we manage. Via Causeway Analytics, we are sharing some of our most perceptive proprietary tools with institutional investors.
Causeway Capital Management LLC is an employee-owned investment management firm based in Los Angeles, California, specializing in managing global, international, emerging market and absolute return strategies. Our clients include corporations, pension plans, sovereign wealth funds, superannuation funds, public retirement plans, Taft-Hartley pension plans, endowments and foundations, mutual funds and other collective investment vehicles, charities, private trusts and funds, wrap fee programs, and other institutions, and are located around the world.
We invest in major equity markets spanning the US, international, and emerging markets. A comprehensive research department of fundamental and quantitative analysts supports our global equity strategies, available through separate accounts and commingled vehicles and managed with a team approach by our portfolio managers. We believe that our fusion of fundamental and quantitative research gives us a global knowledge advantage, which we put to work for our clients.
11111 Santa Monica Blvd.
15th Floor
Los Angeles, CA 90025
causewayanalytics@causewaycap.com
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Causeway Risk Lens is an investment analysis tool provided at an investor’s request and is for illustration only. It is not intended to be relied on for investment advice. Important disclosures accompany Causeway Risk Lens reports, and should be reviewed carefully. In particular, the projections or other information generated by the Causeway Risk Lens investment analysis tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Causeway Analytics® is registered in the U.S. patent and Trademark Office.