Schroders' fundamental investment philosophy is that markets are inefficient. It is our belief that by leveraging detailed and careful research, portfolio managers can achieve superior returns by exploiting these inherent shortcomings. Some of our investment mandates have explicit market-related benchmarks whilst others are more focused on absolute returns. In the latter case, cash is often the implicit benchmark. Either way, to achieve superior performance and achieve their return targets, our fund managers must take active risk-inducing positions.
Careful balancing of such positions can often generate the investment results that our clients seek. However, failure to take appropriate levels of investment risk may result in an inappropriate risk and return profile for our client portfolios. This may also expose our clients to excessive levels of return volatility. As the fund manager of choice for its clients' investments, Schroders takes the responsibility of allocating and spending the risk budgets it has been entrusted with very seriously indeed.
Individual stock selection ideas are continually tested to ensure that we only follow the most robust views. Using quantitative screening, our fund managers are able to refine analysts' recommendations by defining the critical areas that add value in a particular market or sector.
Customised quantitative screening breaks down each market＊s past behaviour. This enables us to determine how stocks with different characteristics (such as 'quality' or different measures of value, etc) have traditionally performed in different markets and sectors. Stocks in the current universe are thus given an objective ranking that mirrors how strongly they currently exhibit characteristics that have historically driven returns in the past. If these objective rankings match the analyst's fundamental ranking, it reinforces our convictions. If not, the rankings encourage our fund managers to review and challenge the analyst's assumptions.
Our highly skilled fund managers each possess an average of 14 years' specialist experience and are given the scope to exercise flair and judgement within a controlled portfolio construction framework. We strive to meet our clients' performance requirements with the lowest level of risk. As a result, the use of structured risk controls and the provision of risk management tools for our fund managers is inherent to 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 portfolios, attributing risk to stocks, sectors, countries and investment styles. 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 that the distribution of risk across portfolios reflects not only their convictions but also the fact that they fully understand all sources of potential risk and return. The PRISM system also provides a high-level check that an appropriate level of risk is being generated given the performance objective of each portfolio.
In our fixed income portfolios we quantify total risk relative to benchmarks. This provides a good indication of how far a portfolio's potential return may deviate from the benchmark return over any given period. We then break total risk down to understand the contribution of different investment decisions such as duration, position on the yield curve, sector and individual security selection, etc.
At Schroders we have a dedicated Investment Risk Group supported by a team of software developers whose shared principal responsibility is to provide
Sophisticated up-to-date investment risk tools that cover all asset classes and therefore ensure our fund managers know and understand the levels of investment risk inherent in their portfolios.
Research insight into risk management trends, market behaviour, and the potential impact they may have upon portfolios.
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.
