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How bespoke modeling can help answer the what-if questions


By Andy Siu and Paul Colwell, CFA | June 28, 2018

Large asset owners can potentially benefit by applying a bespoke modeling framework to address concerns specific to their funds and investment approach.

To act like large asset owners we have to think like large asset owners, and ask the same questions as large asset owners. Our experience working with sovereign wealth funds in Asia means we have established an excellent understanding of their concerns and what they need to know.

The questions they ask are specific to their individual fund. They reflect their objectives, their investment approach, their views of the markets and their investment exposure.

These are questions only a bespoke modeling framework can answer. And that is exactly what we have created.

We believe our framework is helpful when you need to make strategic decisions and see the concentration of risks you are exposed to in case of a stress event. A number of our sovereign wealth clients use it to evaluate if they are positioned to make necessary payments to government, or to fund social programs for long periods of time, which can be critical to their success.

Figure 1. Some of the questions we have encountered include:

Budgeting and liability related
  • What dividends can the portfolio contribute annually to the budget in a sustainable manner? What is the risk to these dividends? Is the source of dividend income concentrated or broadly diversified?
  • What is the risk of not being able to meet interest and principal payments related to debt financing?
  • What is an appropriate mix of investments to meet our target returns so that we can cover our spending needs?
Strategic-decisions related
  • How are changes in strategic allocations expected to impact on the portfolio risk and return profile in the short term and long term?
  • What is the impact of large domestic concentrations in the portfolio? Should these be diversified and, if so, how?
  • What value are we expected to generate relative to a broad passive benchmark, such as the global equity index?
Risk-management related
  • Given current market conditions and our outlook at the next five years, what is the most likely portfolio outcome? And what is the range of possible outcomes?
  • If there is a stress event similar to the Global Financial Crisis, or some future scenarios either articulated by the client or developed by Willis Towers Watson; What would be the expected draw down and the implications on our ability to meet objectives?
  • How exposed is the portfolio to currency risk, liquidity risk and refinancing risk?

We feel the framework can also help you weigh up the pros and cons of different portfolio mixes and understand more about the context in which each fund exists. Download the paper to learn more.

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