Understanding Portfolio Risk Management

Understanding Portfolio Risk Management

Collecting and analyzing threats across individual portfolio investments, such as equities, bonds, money market funds, and cash. The risk is the likelihood that actual investment returns will be lower than those forecasted.

The goal of a portfolio manager is to put together various securities into portfolios that address investor needs and then manage those portfolios to maximize returns for the investment risk taken. Unlike the traditional technique of investing directly in real estate, real estate-backed securities provide investors with an indirect path to take equity and debt interests in real estate. For expert portfolio managers, visit bellwetheram.com.

Property Risks

Having and managing property comes with a number of dangers. Some of the risks include:

  • Tenant default risk, 
  • Covenant risk, 
  • Voids 
  • Fire 
  • Health and safety 
  • Credit risk 
  • Commodity risk 
  • Concentration risk 
  • Market risk 
  • Interest rate risk 
  • Currency risk 
  • Equity risk 
  • Liquidity risk 
  • Refinancing risk 
  • Operational risk 
  • Legal risk 
  • Political risk 
  • Reputational risk 
  • Volatility risk 
  • Settlement risk 
  • Profit risk 
  • Systemic risk 

Some of the other risks include:

Inflation Risk

Inflation risk refers to the possibility that the value of an investment would depreciate due to changes in the interest rate.

Interest-Rate Risk

The danger that the value of an investment may decrease as interest rates rise is an interest-rate risk. 

Market Risk

The possibility that the value of an investment will rise and fall with the stock market is market risk. 

Understanding Portfolio Management

Portfolio Management includes three tasks:

  • Asset allocation
  • Securities selection within asset classes
  • Weighing shifts among asset classes

The model of real estate investing, in particular, provides a framework for asset managers to take positions in public and private real estate and debt and equity markets. To better ensure individual and manager investment decisions are following industry standards, it is important to review what is asset allocation and how to do it right

Most property portfolios get managed from the ground up or at the asset level. The outline is that if each asset undergoes good asset management, the portfolio as a whole will perform at its best. Property investing is a long, tedious, expensive, labor-intensive investment due to its characteristics. 

Property portfolio managers have always managed their portfolios on an asset-by-asset basis, with varying market situations influencing their asset management strategies. Since the tools did not exist, the idea of controlling and executing management strategically at the portfolio level was not addressed until recently.

Understanding Portfolio Risk Management

Risk management is a tough financial asset to handle. It has various intricate matters to look into, along with multiple degrees of risk. Nonetheless, asset managers and owners should be able to make considerable strides in risk management through their investment process, thanks to increasing research into real estate risk and greater data availability. The focus should be on proper strategic choices at the portfolio level, including sector and regional exposures.

These decisions should align with the overall goals of the real estate investment and the portfolio itself. Real estate comparison and credit analysis can be useful tools to monitor actual exposure and ensure strategic and operational alignment in this situation. Suppose investors choose to engage in real estate indirectly. In such a scenario, they must be aware of potential risks in listed and unlisted vehicles. They must ensure that the standards reflect these risks appropriately. 

Performance numbers are a key tool for controlling risk at the asset and tenant level, but instead of concentrating on sector and segment exposures, they should focus on asset-specific or tenancy risks, such as tenant exposure, vacancy rates, and weighted lease durations. Asset owners and managers can dig down to address potential sources of vulnerability by identifying the areas of asset or tenant risk where their portfolio surpasses the benchmark.

Asset and Tenant Risk

The diversity of the asset class is one of the essential qualities of real estate. Because each asset has a unique location and differs by various other qualities, such as age and function, no two assets are alike. In contrast to traditional assets such as shares or bonds, real estate’s heterogeneity makes it hard to build a real estate portfolio that matches the alternative investment market without actually buying the overall market.

As a result, investors should carefully monitor asset-specific or tenancy risks, even after making strategic decisions at the portfolio level.

Managing Asset and Tenant Risk

Given the vast number of factors, managing these risks can be difficult, but the increased availability of investment data allows for more detailed analyses of the relative hazards of property-specific qualities. In addition to providing insights from investment data, benchmarking can help increase knowledge of how stock selection and operation influences performance. 

It does so by comparing market averages for submarkets and using the discipline of attribution analysis. It gives you a better understanding of asset running expenses and shows you which sections of the portfolio are making the biggest impact on net income when compared to the market average.

It is feasible to identify and address potential asset and tenant risk exposures by comparing a portfolio to a benchmark in terms of parameters like occupancy rates, average lease lengths, reversionary potential, tenant concentration, or industry diversification.

Alpha and Active Risk Management

If the only influencing elements were the market or systematic risk level, a portfolio’s return would be equivalent to the beta-tested market return. This, of course, is not the case. Returns fluctuate due to various reasons that are irrelevant to market risk. Investment managers who adopt an alpha strategy take on additional risks to dominate the market. 

Beta and Passive Risk Management

This refers to any time an asset’s return is negative relative to a previous high point. It is another risk metric geared towards behavioral characteristics. We try to address three things when measuring drawdown:

  • each negative period’s magnitude
  • the length of each
  • the regularity

Managing Portfolio Risks

The ability to implement asset and fund management plans and methods is crucial in real estate. This implies maximizing the properties’ value in a real estate investment manager’s portfolio through the selection management of the portfolio’s assets.

The portfolio managers have to divide their resources among the properties they manage for the best potential return, and they must keep their staff on track to do the same. This job in asset management stands out as a one-of-a-kind platform for people with the ideal combination of talents.

David Lockhart