Portfolio Analytics

Alfstad Capital’s portfolio analytics and risk management produces a complete picture of your risk versus possible reward.

Bonds usually carry a fixed rate of interest that is paid annually, plus they have a maturity date when the principal amount of the investment is returned to the investor. These attributes allow us to understand how individual bonds and entire bond portfolios will react to changes in interest rates. Knowledge of all possible future outcomes of each individual bond position supports well-informed decisions that can return superior performance.

We track the regular daily flow of domestic and global economic data so that we may understand, estimate and anticipate any future rate trends or changes that may affect the market value of the bonds held in our client portfolios. We monitor the past performance and future projection of all bonds currently in our portfolios as well as those we may have under consideration. Within our overall portfolio risk management we consider; market, credit, duration, convexity, extension and reinvestment risk that are recognized, quantified and shaped to exacting standards.

When our portfolio analytics show clear up or down rate movement, we shape and manage independent investment strategies which seek to capture the optimal performance generated by those movements on the aggregated performance of the portfolio. Our end goal is the maximization of income and market valuation or the profitability for each portfolio in the current interest rate environment.

Tools for Portfolio Analysis

Bonds are easily modeled and measured via dynamic computer programs that calibrate changes. These changes involve each aspect of the price, return, and risk property of every position in a portfolio, as well as the same aggregated changes for the portfolio as a whole. Our range of portfolio analysis tools provide critically useful information to develop accurate, consistent and verifiable data points that we can use and apply within our risk assessment, and investing strategies and disciplines.

We use different portfolio analytics, reports, and data generation techniques when managing our portfolios and generating monthly or quarterly reports:

Rate shocking

Regulatory bodies and auditors spearheaded the mainstream use of rate shock analysis in the 1980s for its use in quantifying value at risk and for determining the potential extreme variations of market value as rates change and thereby place the institution’s equity value at risk. Now the value of rate shocking portfolios has been expanded and refined to allow managers who use Total Return to manage the portfolio with an optimization of performance within the parameters of investment portfolio policies.

Portfolio Duration and Convexity Analysis

Duration is a commonly understood concept for most bond investors and it is a useful tool for estimating small changes in market yields. Convexity is a tool we use more often due to its more robust and accurate nature and accuracy of price/yield movements across either small or large movements. Duration and convexity are very useful risk modeling concepts in portfolio management. We have found that the application of convexity is most valuable during years when the change in the direction of rates creates uncertainty.

Portfolio Display

The quality of modeling data out is a direct consequence of the accuracy of the data input. Every portfolio’s analytics suite of reports must demonstrate solid data integrity. Complete inclusion of all portfolio holdings, correct price at time of purchase, and size of the position are just some of the many critically important properties.

Even with these sophisticated models, there is no substitute for human inspection of the portfolio analytics to validate the aggregated portfolio integrity. This is the starting point from which every other report begins. The most complex database in the world is ineffectual if the data is out-of-date or incorrect.

Cash Flows

Portfolio performance is a direct consequence of both buying well and reinvesting properly. The greater the duration of a portfolio, the more profound the impact of the funds spun off and reinvested. We model the cash flows under different likely rate changes to ascertain the variability of the flows and the impacts on total return that might result. We can then plan and manage a series of independent investment strategies around the highest probabilities and maximize possible returns and portfolio profitability.

Engineering Portfolios

We create each client portfolio to represent the needs and goals of its owner. A bank or credit union portfolio will be decidedly different from that of an insurance company or pension fund. That said, Alfstad Capital portfolios share many common traits.

A Portfolio Policy

This clearly articulates the operating parameters for the portfolio manager. It sets boundaries about what kinds of securities it is permissible for the portfolio to hold, in addition to setting risk parameters, concentration of capital limits, and many more necessary limits within which the portfolio will be managed to meet its stated goals. From those parameters we begin to construct each portfolio or to interact with an existing one.

Active Independent Investment Management

To the construction process we bring the discipline of active total return investment management—seeking to add alpha, while beta is delivered by the marketplace.

How we go about adding alpha is a product of:

  • The portfolio policy
  • The current rate environment
  • The economic outlook
  • The current pace of GDP growth

If the portfolio is an existing one, we factor both duration and convexity on the market risk side, and the credit quality realities on the business risk side into our independent investment management process.

Active investment management encourages portfolio managers to:

  • Shift into sectors where opportunities present themselves and out of sectors where profits were realized
  • Take advantage of market trends that will not prove to be sustainable
  • Reallocate assets into and out of different portions of the curve
  • Take advantage of value and/or mispriced risks when possible

Fixed Income Analytic Tools

Our use of state-of-the-art resources brings a discipline and a level of knowledge that represents the science of the investment process. Investment decisions at Alfstad Capital are driven through a process that understands the future performance characteristics of a security and its aggregate portfolio in an ever-changing interest rate world. That foresight allows us to structure portfolios to reap the rewards created by anticipated changes.

Diversification

This within each portfolio expands the performance characteristics through non-correlating asset attributes. Fixed-rate, floating-rate, derivatives, and other structure options allow a portfolio to meet the unanticipated changes that are characteristic of the fixed income marketplace.

There can be no guarantee that any particular yield or return will be achieved from any investment. Investors should note that diversification does not assure against market loss and that there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. Purchase of Bonds are subject to availability and market conditions. Generally, bond market is volatile, bond prices rise when interest rates fall and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income. Past performance is no guarantee of future results.

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