Rating Portfolios and Funds

High portfolio complexity may influence negatively expected returns as well as diversification.  This is because highly complex portfolios are generally more volatile hence more fragile. Complexity is, in fact, a new and modern measure of volatility, which takes into account the intricacy of the dynamics of portfolio components and of the changing structure of their interactions.

Universal Ratings provides the capability of quantifying the complexity and obtain measures of vulnerability of portfolios or funds, providing a breakdown of portfolio resilience into components.

Portfolios have rapidly changing structure. In order to understand better the functioning and dynamics of a portfolio it is necessary to understand the structure of the interaction of its components. An interactive example of the so called Complexity Map of a portfolio based on Dow Jones stocks is shown here.

Portfolio rating may be performed in a BLOOMBERG Terminal via our APP. An example of report is illustrated below. The securities at the top of the chart shown below, known as the Portfolio Complexity Profile, are those that induce potential fragilities as well as volatility.

More diversified and less volatile portfolios are built from securities that lie at the bottom of the Complexity Profile.

Download example of RtS rating report.

 

It is interesting to confront our rating of portfolios or funds with their conventional ratings. Like in the case of listed companies, this provides a new dimension and new insights into the structure and sustainability of investments. The analysis is particularly interesting to Asset Management companies which manage systems of hundreds or thousands of funds and portfolios. The map below illustrates the structure of a system of funds.

 Complexity map of a system of 39 funds

Complexity map of a system of 39 funds

The size of each node in the above map is proportional to the impact of each fund to the overall Resistance to Shocks of the system. In other words, funds 3, 4, 17, 22, are those that influence the overall exposure and volatility of the AM company managing the system of funds and this is where risk management should direct more attention.