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IPSA - Asset Management Solution

Objective

Provide portfolio managers with risk-return analyses on both macro (portfolio) and micro (complex transactions) level. The analyses are backed up by active risk management advice - we have risk managers working closely with decision makers to mitigate risk or enhance return.

Investment managers, pension fund trustees, insurance companies are under increasing pressure to consider derivatives and structured products as an asset class to enhance yield or reduce risk (or both). We have developed portfolio micro-management tools for product selection : we are able to analyze the risk-return profile of a class of products in the context of an existing portfolio to highlight what products are suitable for that particular portfolio and to provide valuations and stress testing. On basis of the diagnostics, our risk managers are able to independently assess the appropriateness of products and strategy. Our portfolio management tools are in effect a stand-alone independent resource for portfolio managers. Most companies need derivative and risk management expertise but not on a full time basis. We provide the scale economies without the associated investment in infrastructure: systems, processes and people.

Our service

We perform periodic (weekly/fortnightly/monthly) scenario analysis on portfolios and provide risk managers who highlight and discuss issues arising from the analysis, in particular the probable and improbable downsides and potential upsides. Our risk managers are derivative specialists who monitor the exposures and work with the decision makers on testing investment strategies, valuation of structured deals and hedging requirements. Our niche position stems from our independence. We are not a securities trading operation : our advice is not coloured by in-house positions. We are not deal "preventers" but "enablers". If a product or trade idea is not suitable we will explain why and identify the changes needed to make it a better fit in the portfolio.

Operating procedure

Clients are provided with a static model where they can perform various analyses on their portfolios. This involves being able to try different investment strategies and/ or changing the composition of their portfolios and seeing the likely consequences. They will also be able to monitor the returns under certain market scenarios. The static model will help the company identify portfolio scenarios of interest within their policy framework. Based on these scenarios (re-investment strategy, fixed-floating mix, credit quality, duration etc) we  will run extensive simulation analyses at our offices. The simulations enable us to identify what could go wrong in those scenarios (and with what probability) and capture second/higher order effects which the static model cannot provide. The results will be made available on a password protected area of our website. Our risk managers will examine the results and provide a written report accompanied by a conference call or meeting with the client. The risk managers will assist in any sourcing of products, pricing or monitoring that may be required.

IPSA - model overview

Inputs

• Asset portfolio: bonds/floaters/structured notes/equity
• Funding assumptions e.g. an insurer's liability portfolio
• Swaps and options currently in place
• Market rates and volatilities
• Historical market data
• Reinvestment assumptions: horizon/fixed-floating mix/tenor and credit composition etc

Rate path generation

• Multi-factor Monte Carlo simulation (interest rates, credit spreads, FX and other asset classes, if required).
• All parameters calibrated to current market issuer-specific credit data
• Robust credit event modeling using copulas. 

Cashflows

• All instruments stripped to their constituent cashflows using the simulated asset paths
• Careful modeling of liability cashflows to reflect fund manager-specific event risks

Outputs

• Portfolio diagnostics (e.g. NAV, Avg Yld, Duration)
• Impact of curve shifts
• Performance under Fund manager's views versus the benchmark (market)
• Simulated total return distributions: at specific time points and percentiles
• Cashflow mismatch and duration gap analysis

Follow the links for model screenshots

Portfolio Snapshot

Portfolio Dynamics