Schroders' fundamental investment philosophy is that markets contain structural flaws.
We believe that portfolio managers can achieve superior returns by exploiting inherent shortcomings revealed through detailed and careful research.
Some of our investment mandates have explicit market-related benchmarks, others are more focused on absolute returns. In the latter case, cash is often the implicit benchmark. Either way, to achieve superior performance and their return targets, our fund managers must take active risk-inducing positions.
Careful balancing of such positions can often generate the investment results that our clients seek. However, failure to take appropriate levels of investment risk may result in an inappropriate risk and return profile for our client portfolios. This may also expose our clients to excessive levels of return volatility.
As the fund manager of choice for our clients' investments, we take the responsibility of allocating and spending the risk budgets we are entrusted with very seriously indeed.
We continually test individual stock selection ideas to ensure that we only follow the most robust views.
Our fund managers can refine analysts' recommendations by applying quantitative screening to define critical areas that add value in a particular market or sector.
Customised quantitative screening breaks down each market's past behaviour. This enables us to determine how stocks with different characteristics (such as 'quality' or different measures of value) have traditionally performed in different markets and sectors.
Stocks in the current universe are thus given an objective ranking that mirrors how strongly they currently exhibit characteristics that have historically driven returns in the past.
If these objective rankings matches the analyst's fundamental ranking, it reinforces our convictions. If not, the rankings encourage our fund managers to review and challenge the analyst's assumptions.
Our highly skilled fund managers each possess an average of 14 years' specialist experience and are given the scope to exercise flair and judgement within a portfolio's controlled framework.
We strive to meet our clients' performance requirements with the lowest level of risk. As a result, our fund managers use structured risk controls and are provided with risk management tools that are inherent to our investment process.
Only Schroders deploys PRISM (Portfolio Risk Investment Strategy Manager), our proprietary, interactive risk management software system. PRISM enables fund managers to monitor portfolios in real-time and deconstructs portfolios, attributing risk to stocks, sectors, countries and investment styles. Its extremely comprehensive multi-dimensional approach to risk monitoring takes into account many measures of potential risk.
Our equity fund managers use PRISM to ensure that the distribution of risk across portfolios reflects their convictions and that they fully understand all sources of potential risk and return. The PRISM system also provides a high-level check that an appropriate level of risk is being generated given the performance objective of each portfolio.
We quantify total risk relative to benchmarks in our fixed income portfolios. This provides a good indication of how far a portfolio's potential return may deviate from the benchmark return over any given period. We then break total risk down to understand the contribution of different investment decisions such as duration, position on the yield curve, sector and individual security selection.
Dedicated Investment Risk Group
At Schroders we have a Dedicated Investment Risk Group supported by a team of software developers who work together to provide:
- Sophisticated up-to-date tools that cover all asset classes and ensure our fund managers know and understand the levels of investment risk inherent in their portfolios.
- Research insights into the potential impact risk management trends and market behaviour might have on portfolios.
- A source of independent oversight and review to ensure that the risks being taken within a given fund are appropriate and consistent with its risk and return profile.