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Portfolio Construction

Uncover Security Exposure Faster With Portfolio Risk Analytics

Read Time: 3 Minutes

As buy-side analysts piece together work in research, data, and portfolio-construction platforms, clunky tools slow down the process. Disconnected platforms drag out evaluation and conceal potential opportunities.

With more efficient portfolio risk analytics, you can save time and test your hypotheses faster. Quickly peel apart the holdings in managed investments, models, ETFs, custom benchmarks, and client portfolios to see what’s below the surface.

Here’s how.

Categories of Risk Exposures

The return premia of factors like investment style or sectors shift with the markets.

Prepare portfolios for market moves by making informed decisions across the portfolio. Look-through analysis can expose concentrated portfolio exposure to factors that make you vulnerable to certain market conditions.

The new Direct Lens interface makes it easier to roll up data across the portfolio and test how changing an investment or weighting would affect the overall portfolio.

Delve into factors like the below.

Sector exposure

Detailed, specific analysis of sector exposure can help analysts understand the risk sources in their portfolio and what levers to pull in market headwinds.

In the last year, cyclical and sensitive sectors have staged a resurgence thanks to excitement about AI technology and a more stable U.S. economy. With a 190% return in the first half of 2023, Nvidia became the poster child for the tech sector and its continued double-digit gains.

Meanwhile, consumer defensive and basic materials sectors stumbled. The energy sector also slumped in the second quarter stemming from the reverberations of declining oil prices.

Have sector trends tipped the balance of your asset allocation? Portfolio risk analytics can reveal rebalancing opportunities.

Currency exposure

After pulling even with the Euro in 2022, the U.S. dollar weakened in 2023. Foreign equity returns benefited, as developed European markets posted 2.66% gains in the second quarter of 2023 and 23.42% gains over the trailing year.

How did fluctuating exchange rates affect your investments? At the portfolio level, you can see how currency hedges and exposures to foreign markets influenced returns.

Interest rate exposure

Bonds are particularly sensitive to shifts in interest rates. When interest rates rise, bond prices generally fall, leading to potential losses for bondholders.

But after a choppy first quarter, the second quarter of 2023 proved to be less volatile for interest rates and credit markets.

Use look-through analysis to see how holdings contributed to overall interest-rate exposure and how trimming positions could affect returns.

Liquidity exposure

Portfolios heavy in hedge funds, options contracts, stock futures, and other illiquid assets make it difficult to sell assets on short notice for a reasonable price.

In the second quarter of 2023, liquidity proved to be a favorable return factor. What overall risk does this pose for your portfolio? With efficient portfolio analysis tools, you can efficiently sum up and present your findings to your investment team.

International exposure

International diversification doesn’t always reduce risk, especially if it means investing in the same style or sector. Risk modeling helps you understand the real-time return premia associated with investment risk factors.

After a so-so finish in Q1, Emerging Latin America paced all regions in the second quarter. Brazil’s farm sector surged, and soybean sales are expected to reach record numbers in 2023. Mexico’s economy also boomed, propelled by the service sector’s expansion.

In Direct Lens, analysts can quickly see how a portfolio (or a specific fund) invests in Latin America and regions across the globe.

Analyze as You Construct with Direct Lens

The Morningstar Direct Lens interface makes it easy to build, edit, and analyze portfolios. In one place, you can look through individual holdings and roll up exposure across the portfolio.

Fine-tune asset allocations, sector exposure, and style-box positioning to bring your investment vision to life. The new tool combines attribution with the deep, broad funds and competitive analysis data you trust from Morningstar.

See it for yourself with a 20-minute demo.