An end-to-end investment platform is powering the risk management of BlackRock’s model portfolios.
Speaking at the August IMAP Dealer Investment Forum, Josh Persky – BlackRock’s Head of Model Portfolios and Solutions Australia – provided an informative presentation on risk management and how BlackRock uses its risk analytics tools in monitoring and managing multiple risk parameters within its Australian managed account model portfolios.
According to Persky, when it comes to defining what risk management is in a model portfolio, planners and investment committees need to properly understand: “What it is you own and why you own it.”
“This is fundamental to your investment philosophy,” Persky said. “And along with cost, which can eat away at investment returns, it’s vitally important that the right people sit on your investment committee. The committee needs to be able to optimise each of your model portfolios individually.”
Underpinning BlackRock’s approach to risk management is its proprietary risk management platform that it uses for its model portfolios – Aladdin.
Running model portfolios is difficult… This is not a ‘set-and-forget’ strategy. It requires constant monitoring.
Aladdin (which stands for Asset, Liability, Debt and Derivative Investment Network) is an operating system for investment managers that seeks to connect the information, people and technology needed to manage money in real time. The system is currently used by 25,000 investment professionals around the world.
According to Persky, the Aladdin platform combines sophisticated risk analytics with comprehensive portfolio management, trading and operations tools on a single platform that enables informed decision-making, effective risk management, efficient trading and operational scale across asset classes.
“This tool enables planners and investment committees to make more informed decisions around the whole investment process,” Persky said.
He added that Aladdin is used to “stress test” portfolios, which helps to mitigate shocks to portfolios, similar to what occurred with Brexit and the US Presidential elections.
And while the system has been widely effective in safeguarding against portfolio shock, Persky admitted that even using the Aladdin system as part of its approach to risk management didn’t mean BlackRock always got its investment decisions right.
“We actually missed the market bounce with the Trump election, but so did most investment managers. The bounce was very unexpected,” he said.
Other important factors as part of BlackRock’s model portfolios are ‘implementation’ and ‘monitoring’.
“Running model portfolios is difficult,” Persky said. “That’s why our investment committee can override model portfolios if required to do so. This is not a ‘set-and-forget’ strategy. It requires constant monitoring.”
Persky also confirmed that BlackRock was currently in conversations with a number of “interested parties” to make the Aladdin tool available to more investors.
