Angela Ashton

In a world where a global pandemic can come out of nowhere and send investment markets plunging in synchronised panic, holding an investment portfolio is a stressful experience for not only direct investors but also financial advisers.

While it is human nature to focus on the expected return, the risk being taken to generate that return doesn’t always get the attention it deserves – as March 2020 showed, an investment portfolio’s settings can be “all right until they’re not,” notes Angela Ashton, founder and director at Evergreen Consultants, an independent investment consulting firm

“There is no way to invest without risk, but the best way to guard against risk is constantly to measure it and assess it – and to manage it.”

“One of the most common tools that institutional investment managers use to manage their risk is portfolio “stress-testing,” a tool that helps them to estimate the potential impact on their portfolios of extreme – yet possible – events or movements in the financial markets,” adds Ashton.

Financial advisers find this difficult to do adequately, says David Cohen, senior analyst at Evergreen Consultants. “Adequately assessing the range of risks being run by an investment portfolio and estimating outcomes under a range of different scenarios can be a very complex procedure, but it is something that directly benefits the advice process.

“It is not only an essential part of client reporting, it is a crucial element of managed account compliance,” says Cohen.

Evergreen Consultants has launched a portfolio stress-testing tool within GreenVUE, Evergreen’s proprietary portfolio analytics system. Developed and fine-tuned in-house over recent years, GreenVUE allows an adviser to visualise their investment portfolio’s risk and return characteristics, given multi-factor analysis of Portfolios in a range of events and market influences.

“We think this is a unique tool in the adviser marketplace,” says Cohen. “Most institutional investment managers would have some form of scenario stress-testing, but we think that we are the first retail investment consultancy to develop and make these tests available to financial advisers.”

Examples of the scenarios from recent years that GreenVUE can plug-in to put portfolios through their paces are re-simulations of the global financial crisis (GFC), the Euro debt crisis, the US credit rating downgrade, oil shocks and US recession, rising global interest rates, trade conflict and the COVID-19 pandemic.

“The tool assesses how today’s portfolios would perform if these historical events – and the markets’ reaction to them – were repeated, in terms of the total return, maximum drawdown and volatility that could be expected.”

Cohen says Evergreen’s adviser clients would typically use the information that GreenVUE gives them in their individual investment committee discussions as part of model portfolio reviews.

“It will act as a risk management tool in the first instance, as we can use it to test where we think Portfolio positioning is in terms of our model portfolios, and what market impacts we could expect on the portfolios in stress environments.

“These will also play a role in model compliance reporting to platforms who ask for stress testing in their capacity as responsible entity (RE) of the models,” Cohen adds.

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