Risk management of our funds | What we offer | Liontrust Asset Management PLC
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Risk management of our funds

Liontrust ensures that appropriate and prudent levels of risk are taken to meet the investment objective and policy of our funds. Liontrust has a Portfolio Risk Committee (PRC) to oversee the management of portfolio risk throughout the business and uses a Risk Management Process (RMP) to monitor and measure as frequently as appropriate the risk of a fund’s positions and their contribution to the overall risk profile of a fund. This oversight encompasses portfolio performance, establishing parameters for exception reporting and ensuring that we provide appropriate client communications.

In general, risk within a fund is controlled and monitored in two ways:

  1. the Investment Process
  2. predetermined risk controls and limits

Every Liontrust fund goes through a formal product approval process to ensure all necessary considerations are made, which include ensuring that all investment products have an appropriate risk profile for the typical investor and there is adequate disclosure in the fund documentation so investors can make informed choices concerning risks. Liontrust will consider appropriate limits to ensure a fund’s exposures are consistent with the regulations and its investment objectives. These will include notional, Value at Risk (VaR) and stress-based limits as appropriate and are detailed in the RMP.

For each fund, a profile of a typical investor is considered and the fund must be managed with the profile in mind. The profile will include an investment style, a recommended minimum holding period, an expected volatility range and any other relevant points: 

  1. Investment Style
  2. Minimum holding period
  3. Expected Volatility Range
  4. Global Exposure and Leverage
  5. Permitted Investment and Concentration Limits
  6. Use of Derivatives & Short Selling
  7. Geographic Risk and Market Restrictions
  8. Currency and Exchange Rate Risk         
  9. Liquidity Risk
  10. Interest Rate Risk
  11. Performance Volatility

The PRC may also use other risk measures to control risk within a portfolio where it deems it appropriate to do so. These additional risks may include, but are not limited to, Yield, Beta, Stop Loss, Effective Volatility or Tracking Error.

The PRC meets at least monthly to ensure that all the monitored risk controls are in place, the risk limits are appropriate and reports on the various aspects and activities discussed. In summary, the PRC sets the risk parameters of a fund, the Investment Risk or Operations team monitor the limits and the compliance team oversee the monitoring process is effective and manage breaches. This ensures a clear segregation of duties between roles.

The investment risk or operations team monitor all funds on a daily basis to ensure that the portfolios are within the specified limits as agreed by the PRC as well as any additional controls specified in an IMA. These limits are inputted into the Compliance Monitoring System (CMS), and when the centralised dealing team wish to trade on a restricted position, the rationale must be recorded, and in some circumstances must be approved by the Compliance team before a trade may by routed on Liontrust’s Order Management System (OMS).

Any breaches recorded either pre-trade, post-trade or at close of business are reported to the Compliance team who then manage any breaches under agreed guidelines. The Chief Risk Officer has the power to override any trading that would result in the fund falling outside the pre-established risk parameters. Details of any breaches, and any corrective action taken, will be reviewed by one of the Partnership Committees of the Group whose minutes are reviewed by the Liontrust Board.

The CMS automatically checks for certain rules such as negative stock positions in long only funds, trades in stocks held on a Stop List and breaches in the IMAs. If any breaches are discovered then an email is automatically sent to the fund managers, the Dealers, the Compliance team and the Operations team to ensure full disclosure and appropriate measures are taken. A daily summary email from the CMS detailing all breaches and any positions that are close to investment limits are highlighted to the fund managers, Dealing Team, Risk, Compliance and Operations teams.

The Compliance team monitors and reviews the process regularly as part of the Compliance Monitoring Programme to ensure that all procedures are being followed. They also review the fund management department to ensure that all relevant regulations are being followed including Best Execution, Order Aggregation & Allocation and Treating Customers Fairly. On an annual basis, Liontrust commissions an external accountancy firm to perform testing of the integrity of aspects of the Group-wide control environment including a number of risk controls. The results of this testing, including any exceptions identified, are made available to senior management and the Board.

 

Risk/Compliance and Portfolio Management Systems

Liontrust uses a suite of Portfolio and Order Management systems from Eze Software Group, a market leading system combining a Portfolio Management System (PMS), Order Management System (OMS), Execution Management System (EMS), a Compliance Monitoring System (CMS) and reporting tools. All the portfolios are listed on the system and it allows the fund managers, the Dealing team, Operations and Risk to calculate the exposures each investment position of a fund has and their overall effect on a fund's portfolio, such as the currency, sector or market cap exposures of funds at a gross and net basis. The system is currently able to manage all asset types used at Liontrust: equities, bonds, foreign exchange and derivatives, including Total Return Swaps, Credit Default Swaps and Futures.

The system is also able to calculate the notional exposures of these instruments as well as their actual values. It also calculates the overall exposures and leverage. The system combines the holdings’ data with historic liquidity data to calculate the current liquidity of the fund in normal and stressed conditions for equity based portfolios. All the orders are managed via electronic books and Liontrust uses the EMS to manage the electronic order routing to Brokers via FIX. The PMS is reconciled daily to the systems of the administrator, custodian and derivative counterparties.

In additions to the Eze system, the investment teams may create their own Excel based systems, which provide additional information including portfolio characteristics and some risk measures linked to real time prices. These are tailor-made for each of the investment teams but are not involved in the order raising or dealing process. The Eze system, supplemented by modelling of instruments and any hedging, is also used by fund managers to manage Basis risk where appropriate.

The monitoring and control of portfolio risks including liquidity, currency, leverage and global exposure is undertaken using the Eze software as well as the risk analysis suites provided by Factset and UBS Delta. These systems have multiple portfolio reports that show the breakdown of positions by country, sector, long/short or currency as well as reports on liquidity, leverage and counterparty exposure that are available on live portfolios (Eze) or historic portfolios (Eze, UBS and Factset).

The portfolios are automatically uploaded to Factset and UBS on a daily basis. Factset and UBS provide a factor based risk model, a stress and scenario testing system and a parametric VaR system as well as performance attribution and analytics to understand the drivers of return and risk in historical portfolios. The portfolios are also automatically uploaded to Bloomberg’s Portfolio Analytics system on a daily basis, allowing the investment teams, the centralised Dealing team and the Risk team to access and analyse the Funds on a real time basis.

Liontrust analyses all the portfolios using Style Research’s risk models on a monthly basis, and more frequently as required, to produce a detailed style based analysis of all the portfolios. This includes dividing a portfolio’s drivers into style factors and showing a portfolio’s largest risk contributors as well as its expected volatility, Beta and tracking error.

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