With economic turmoil and the resulting market volatility over the past several years, managing risk in portfolios has received greater attention. Active risk management has always been core to Fiduciary Trust’s investment management approach, and our processes have been designed to help maintain appropriate risk/reward balances relative to client objectives through variable market environments.
Investing across market highs and lows for 80 years has taught us to expect the unexpected and to have the people and processes in place to navigate both the risks and opportunities of the global marketplace.
We believe the basic goal is not to eliminate all risk; rather it is to seek to maintain risk levels that we believe are appropriate for each client’s circumstances. We apply a three-pronged philosophy to managing risk that seeks to ensure that it is recognized, rational and rewarded.
Risk is inherent to market participation. That is why we take a comprehensive, disciplined approach to risk management, looking at both risk and return from multiple perspectives. The key to our approach lies in understanding our clients’ risk tolerances, and assessing both quantifiable risks as well as risks that are qualitative in nature.
While risk is a common term, few people tend to share a common definition of it. Many investors view risk as the possibility they will lose money, or that their investments will fail to meet their objectives. Others view it as the chance an investment will perform poorly compared to a similar security or benchmark. In either case, risk becomes a difficulty when it is unintended, misunderstood or uncompensated—all of which come to light when there are gaps between investor expectations and actual experience. And, for assets held in trust, investment fiduciaries must manage risk to meet the directives of the trust, while considering the needs and expectations of beneficiaries for multiple generations.
While no methods are capable of fully mitigating risks related to investing, our formalized controls seek a reasonable level of protection by identifying and actively addressing situations that may negatively affect portfolios. The importance of these controls is shown not only through policies and procedures, but also through the alignment of our portfolio managers with our core values and philosophy as a firm.
1. RECOGNIZED
Through our formalized and closely-controlled processes we seek to identify and recognize potential risks at the overall portfolio level and at the individual security level.
At the onset of portfolio construction, we consider each client’s risk and return objectives when we develop their long-term strategic allocation target, one that we believe will provide a high probability of meeting their long-term objectives. We apply both historical and forward-looking analyses to establish risk parameters and to determine the asset class weightings that we believe will collectively match each client’s desired risk/reward expectation.
Allocation recommendations are made by our Asset Allocation Committee, led by our Chief Investment Officer and our Director of Fixed Income Strategies. Decisions are informed by research and analysis provided by senior analysts in our Strategic Advisory Group, as well as by senior investment professionals across the firm. Our teams continually analyze the market environment to recognize areas of heightened risk, and actively adjust asset class exposure recommendations tactically as market conditions change.
Managing Sector and Security Risk
Each of our portfolio managers is a member of our Equity Strategy Group and participates on one of ten sector research teams. Their research and views on risks and opportunities are shared regularly via:
As part of Franklin Templeton Investments, we also have direct access to global research analysts and investment professionals who provide extensive analysis and intelligence on thousands of securities.
2. RATIONAL
The second prong of our risk management philosophy is to ensure that identified risks are an intended and rational part of each client’s portfolio strategy.
Portfolio Oversight
Fiduciary Trust employs several controls with the goal of ensuring that portfolio risks are reasonable, calculated and in line with client risk tolerance levels.
Senior Level Oversight
Fiduciary Trust utilizes a number of senior level committees that are responsible for overseeing portfolio and operational activities.
3. REWARDED
Portfolios are measured on relative and absolute performance to evaluate whether risks have been appropriately rewarded. Each portfolio’s asset allocation, sector weightings and holdings are reviewed to identify gaps in performance expectations.
Portfolio Performance
Investment results of every portfolio are reviewed annually by the head of our Investment Management group. Performance is evaluated relative to benchmarks and peers, and more importantly, on a risk-adjusted basis to seek to ensure that risks being taken in portfolios are being appropriately compensated.
Data Analytics and Modeling
Our Asset Allocation Committee reviews and retests our long-term asset allocation strategies on an annual basis. The committee uses a blend of quantitative and qualitative inputs to determine a series of recommended strategies that deliver a range of risk/reward profiles. The team also analyzes market trends and extrapolates them on a forward-looking basis so that our views regarding risk evolve with long-term market trends.
Trade Monitoring and Execution
Our seasoned equity and bond traders actively seek the best execution for orders placed by our portfolio managers. They monitor all trades for potential errors and ensure transactions are successfully executed.
This communication is intended solely to provide general information. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.