The implementation of risk management strategies in managed account portfolios can be challenging. Uwe Helmes (BlackRock), Simon Ho (Milliman), Glen Foster (Atrium), and Andrew Stadelmann (BT) discuss their approach to risk management.

Risk management is an essential element of investing and portfolio construction. It involves identifying, analysing, and accepting or mitigating uncertainty in investment decisions. At its core, risk management is the process of monitoring and dealing with the financial risks associated with investing.

However, implementing hedging strategies as part of risk management in a managed accounts structure can be challenging, says Glen Foster — Head of Risk and Senior Portfolio Manager at Atrium Investment Management. Currently, Atrium runs about half of its funds in managed accounts, yet when it comes to managing risk, Glen concedes there are a number of constraints in using managed accounts. One such constraint is not being able to buy derivatives directly in this type of structure, compared to a unit trust.

However, Glen says the industry is increasingly finding solutions to overcome these constraints. At Atrium, for example, it uses ‘access funds’ — a vehicle it has set up on platform — which holds one or more managers.

“We have one ‘access fund’ that holds just global long/short equity market neutral managers, and within that, we can hold derivatives,” says Glen. “So, by using these ‘access funds’, we have much greater flexibility in managing risk. We can hedge currency and use put options to help shape our portfolios.”

Speaking at an IMAP Independent Thought Roundtable on risk management, which was hosted by BT, Glen acknowledges that in terms of meaningful overlays for portfolios, bigger ‘access funds’ are required. That’s why Atrium is moving towards a core equity vehicle, “because equities are where most of your risk is, so that’s where you tend to want to do most of your hedging”.

“Within that you might want to then allocate some of the risk budget to hold put options, or hedge a currency, or even add some assets with interest rate sensitivity that might be missing from the rest of your portfolio,” says Glen.

BlackRock takes a different approach to implementing risk management strategies within its managed account portfolios, says Uwe Helmes, CFA — Investment Strategist at BlackRock. He adds that where BlackRock has flexibility with mandates, derivative strategies can make a lot of sense, but agrees that within a managed accounts structure, derivatives are hard to do.

“Instead, as a hedging strategy, we look at other asset classes, like gold, where you can get a good exposure quite cheaply. So, in periods of market stress when asset classes become closely correlated and you want diversification to kick-in, gold is an asset you can access easily and it serves as a good diversifier in periods of market stress,” says Uwe.

“We also use currencies, as well as tactical tilting. Our managed account clients value the flexibility of tilting the portfolio in periods of market stress, where we put tactical tilts in place to de-risk the portfolio — like moving out of equities into cash.”

However, Andrew Stadelmann — Researcher and Managed Accounts Specialist at BT — accepts that not all portfolios are risk averse, and some portfolios actually seek risk. In such scenarios, he says it’s important to remember that the adviser is managing the client’s personal risk, whereas the investment manager is managing the investment risk.

Glen agrees, adding that advisers are best placed to ascertain the risk appetite (the amount of risk a client is willing to accept or retain in order to achieve their objectives) of their clients. “My job then is to build a portfolio that stays within that risk appetite, whilst working within the risk tolerance (the levels of risk taking acceptable to achieve a specific objective or manage a category of risk) to the objective of the risk appetite.”

Uwe believes the adviser plays a crucial role to ensure their client properly understands the level of risk they are getting into with their investments, as well as to make sure that the asset manager or product provider delivers on what they say they will do within the portfolio.

“Risk isn’t a bad thing,” says Uwe. “In our growth portfolios, we don’t like diversification. If we have conviction in a manager, we want them to pick the best 20 stocks. So, if you’re willing to take on that risk, then pick a manager or a couple of managers. But understand that having high conviction with 20 stocks means you’re taking on a lot of risk.

“If you can stomach that risk to maximise your returns, then maybe that’s exactly what you need to be doing. However, by blending 10 or 20 managers together, you’re going to be lowering your active risk. So, it really depends on the client and their appetite to take on risk. Advisers need to put clients in the most appropriate portfolio for their needs and objectives.”

Whilst Milliman’s portfolios are designed primarily for pre-retirees and retirees, Simon Ho — Senior Portfolio Manager at Milliman — says advisers also place accumulator clients into these portfolios, particularly in the high growth portfolio.

By doing so, Simon says it provides both advisers and clients with comfort knowing that if a tail risk scenario happens, they are able to mitigate the risks. “They also value the more stabilised volatility that our portfolios provide. At the end of the day, it’s about clients achieving a higher risk-adjusted return, while also enabling accumulators to maximise their return with the sleeve of risk they take on.”