Asset classes

Our risk management

We prefer to control risk through tracking error but we can also set limits on absolute exposure and/or value at risk (VaR). We use the expected returns generated following our scenario analysis to identify the potential returns for any trade, and use both scenario risk (i.e. the outcome of an active position established for one scenario if another scenario comes to pass) and historic risk (from a 17 year database) in evaluating the risk-return trade-off of a related active position. Thus the rewards and scenario risks will vary as our scenarios change and the markets move, but the historic risk will be fairly stable over time.

The Aviva Investors strategy team calculates the risk of all candidate and actual absolute TAA portfolios, but as an independent control and a cross-check, the Aviva Investors risk team measures risk on a daily basis. The strategy team uses two models to help analyse risk: BARRA’s World Markets model and OCCAM.

The risk within the portfolio is monitored daily to ensure that the level of risk is appropriate for the current level of confidence and that it on average is appropriate to achieve the target return. A key element to the investment process is the preference given to portfolios that are robust. Positions are chosen that, in aggregate, aim to generate a respectable (returns above benchmark) performance across a range of economic and market scenarios.

Risk models and optimisers are incorporated into the process to manage downside risk effectively and ensure that portfolios are optimal (in terms of lying close to the efficient frontier). This process will favour positions that offer diversification benefits.