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About the Author
Stephen Borthwick
Stephen Borthwick is the Technical Director and a Co-founder of Impact Investing, an investment decision tools and information resource set used by portfolio managers and pension funds around the world. Stephen's responsibilities include quantitative design and regional responsibilities for the Japan and Asian businesses. He began his career in London working as a quantitative analyst in the capital markets team at JP Morgan Investment Management before moving to Australia in 1997, where he held roles as Head of Quantitative Analysis in both buy-side and sell-side institutions in the Australian financial industry. Stephen's formal qualifications include a Doctor of Philosophy from the University of Oxford, a Master of Philosophy from Cambridge University and a Bachelor of Engineering (Honours) from Sheffield Hallam University.
Articles Published
Showing results 1 to 2 of 2
Portfolio Risk Analysis should Not Stop at Tracking Error
Active portfolio management is the art of balancing risk and return. In the absence of arbitrage, or inside information, an active manager must take on risk in order to achieve an excess return that compensates ... Read moreActive portfolio management is the art of balancing risk and return. In the absence of arbitrage, or inside information, an active manager must take on risk in order to achieve an excess return that compensates clients for the fees charged. The term "balance" insinuates that half of the art of portfolio construction lies in stock selection and the other half in risk management. It is therefore interesting to consider how one-sided the majority of fund management efforts are with regards the mix between research and portfolio construction. Despite recent trends to incorporate deeper risk understanding in the management of portfolios, the degree to which risk is actually viewed all too frequently comes down to little more than compliance adherence and tracking error recognition. In this paper we aim to demonstrate that this approach to portfolio risk management is a far from optimal as reliance upon tracking error as the primary, or worse, sole risk metric is subject to two key problems.
Portfolio risk analysis should not stop at tracking error
Active portfolio management is the art of balancing risk and return. The term "balance" insinuates that half of the art of portfolio construction lies in stock selection and the other half in risk management. Read moreActive portfolio management is the art of balancing risk and return. The term "balance" insinuates that half of the art of portfolio construction lies in stock selection and the other half in risk management. However the majority of fund management efforts to manage risk have become very one-sided focusing too much on monitoring tracking error. Because tracking error can be misunderstood by practioners this leads to risk management process that are less than optimal because it removes the flexibility from the manager to add alpha by reducing macro level diversification opportunities. A better approach is to encourage managers to utilise comprehensive and thorough risk analysis in conjunction with investment research enabling them to capture recognisable market opportunities
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