Understanding and mapping risk is at the heart of what we do
A holistic view of risk
As risk is multi-dimensional and always evolving, so is our risk management approach. Taking a 360-degree perspective, we seek to model, analyse and map the broadest possible spectrum of risks. Our focus on research helps us to identify potential future risks early. We look beyond traditional risk measures, such as volatility and correlation, to gain a deeper understanding of financial markets. This allows us to take risks with an asymmetric return profile, where upside potential is greater than downside risk. Our goal is then to combine them to achieve effective diversification and, finally, be able to adapt quickly to changing market conditions. As an example, our equity investment process integrates a broad range of risk factors, such as volatility, correlation, valuation, macroeconomic risks, ESG, liquidity and crowding. We constantly look for new sources of risk that could affect equity markets and adjust our process and portfolios as necessary. By combining both systematic and discretionary analysis, we aim to deliver steady, long-term outperformance with downside protection.
We also take a multi-dimensional view when constructing multi asset portfolios. Rather than looking only at volatility, we define risk as potential loss of capital, which is the true risk that investors face. Using a proprietary Expected Shortfall model, we aim to incorporate risks that are ignored by volatility-based analysis, such as valuation, asymmetry, tail risk and liquidity.
By focusing on different elements of risk, we are less dependent on individual measures. This allows us to apply a more robust risk allocation across our portfolios and seek to achieve a smoother distribution of returns over the long term.
Our approach to analysing, managing and allocating risk rests on a solid foundation of scientific research and academic collaboration.
Managing risk in private equity
In private equity, we seek exposure to companies that are underpinned by long-term trends. Through in-depth research, we aim to identify areas of the market with the greatest growth potential. With a network of 500+ investment partners and a highly experienced team, we have a deep understanding of both global and local market risks. Our reputation as a reliable long-term investment partner helps us maintain a strong, high quality deal flow. We also often gain early and sometimes exclusive introductions to investment opportunities. We avoid leverage, favouring instead companies with strong potential for operational improvement or organic growth, which means that performance is less dependent on the macroeconomic environment. Our strict price discipline and ability to access off-market deals means we are largely unaffected by market volatility in terms of pricing and volumes. Our in-depth due diligence process allows us to fully assess potential risks associated with each investment and its likely impact on the wider portfolio. We aim to construct robust portfolios that are typically diversified by geography, industry and strategy, while minimising specific sector, country and currency risks. Our involvement on the boards of most investments allows us to address any issues and closely assess exit potential to optimise returns.
Asset allocation as a pillar of risk management
Unigestion also aims to manage risk through superior asset allocation. Rather than using a simple risk-based allocation, we root the whole allocation framework in our understanding of the macro economy. By diversifying risk across both return sources and macroeconomic environments, our strategic allocation is designed to deliver consistent returns over the long term. We use this macro risk-based approach in our multi asset and alternative risk premia portfolios. We combine our long-term strategic allocation with a dynamic element in order to adapt our positioning as market conditions change. To monitor macroeconomic risks in real time, we use a proprietary range of indicators that assess the risk of recession, inflation and market stress. The output from these sophisticated tools – known as ‘Nowcasters’ – allows us to dynamically adjust our portfolios to the prevailing environment. Finally, we may apply a discretionary allocation to tactically dial risk up or down around specific market events, such as central bank announcements. This can be particularly valuable during times of market stress or uncertainty. Again, our risk management process applies a mix of systematic analysis and the forward-looking insights of our team. Our equity factor strategies also use macro risk-based dynamic allocation to enhance risk-adjusted returns. This process considers both micro drivers and sensitivity to macro regimes, based on output from our Nowcaster indicators.
30 years of experience across primaries, secondaries and directs, focusing on the global small and mid-market
Downside protection and positive return asymmetry underpin the performance of our risk-managed equity strategies