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12/07/2010

What’s Your Risk? Single Name Security Exposure Analysis


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FACTSETOver the last two months, I’ve visited many of our portfolio analytics clients in the U.S. to gather feedback on FactSet’s new Single Name Security Exposures tool. Single Name Security Exposures lets you look across all portfolios or a subset of portfolios to quantify your exposure to a security, an issuer, an industry, a country, or a specific set of securities. Simply put, it tells you how much you own and where you own it.

Talking to our clients, I learned that Single Name Security Exposures is a compelling complement to ex-ante portfolio risk analysis. First, it is so simple to understand that it is really tangible. It isn’t a predicted standard deviation of excess returns. There isn’t a theoretical dimension to it. It is risk that everyone can easily understand.

Your Risk—Right Now

In addition, Single Name Security Exposures clearly connects to the key news of the day. When a major market event happens, it isn’t clear when that event will be reflected in ex-ante risk numbers. Also, it isn’t necessarily clear what change will result from the event. With Single Name Security Exposures, the “when” and the “what” don’t have any ambiguity. It isn’t ex-ante. It isn’t ex-post (though you can run historical analysis). It focuses on right now.

The ongoing reporting aspect of Single Name Security Exposures revolves around compliance, while the ad hoc value relates to the news of the day or a big market event, including:

  • Country exposures like financial concerns in Ireland or political concerns in South Korea
  • Company exposures, such as outstanding results from AAPL
  • Industry exposures such as disappointing numbers of U.S. existing home sales
  • New statistics suggesting, for example, that the number of Americans with diabetes will spike in the next 30 years

As a risk manager or CIO, as you formulate your views on macro trends that will guide the market or as you try to act on the ideas from an investment committee meeting, you want to know your exposure to the companies that embody trends or your key insights. Single Name Security Exposures is a compelling complement to ex-ante risk analysis in that research.

Now, when we talk about this type of analysis, it is easy to cite the Greek debt crisis or Enron as great examples of why we need to consider these exposures. Similarly, when we talk about ex-ante risk analysis, it’s easy to focus in on excessive risk or high risk numbers as always bad. This clearly isn’t true. While the most glaring examples of why Single Name Security Exposure analysis is relevant tend to be negative, the analysis lends itself to positive or bullish investment ideas even more than ex-ante risk analysis.

When a company beats estimates or announces a break-through innovation (in technology or in medicine or in a consumer product), you want to understand your exposure. In the last few years, Apple is a great example of this. In the context of Single Name Security Exposures, it is the counter to Enron.

As another example, I mentioned wanting to understand your exposure to a significant increase in diabetes in the U.S. That’s bad news for society, but from an investment perspective, if it occurs, it is going to mean increased importance and profit for a group of companies.

What It Takes

Single Name Security Exposures brings together four key pieces of FactSet. First is client portfolio holdings data. Over 700 investment managers and plan sponsors use FactSet for performance attribution, characteristics analysis, and ex-ante predictive risk. To facilitate portfolio analytics, those 700 clients are loading over a million portfolios onto our system every night, which means we have a lot of data at hand that is integrated from accounting systems, custodians, and prime brokers. We also have more than 50 custodian and prime broker position feeds that come into the system every night.

Second, that portfolio data is combined with entity data. In Single Name Security Exposure, you rarely want to focus on the exposure on a single security. You want to look at the company, including equity, bonds, options, and credit default swaps. If you miss an asset class, you have a dangerously incomplete picture of your exposure. By having rich entity data about parents and children and securities, FactSet users can look at exposure to an individual security and all related equity securities or all the securities related to the issuer.

The third piece pulls in screening, which lets you translate an idea into a set of securities for exposure analysis. In exposure analysis, you often want to look at securities that fit a certain theme, so screening is critical. That could mean finding securities that have been downgraded by Moody’s or S&P in the last six months or all microcap biotech companies in Continental Europe.

The fourth key piece is that we have wired all of these results into the same reporting and charting tool that we use for attribution analysis, so users can slice and dice the data and turn it into reports and charts that make it easier to digest and act upon the information.

In my visits this summer and fall, I was startled by how many very sophisticated clients were performing this analysis in an incredibly manual, non-systematic way. With Single Name Security Exposures, our goal, as always, is to help our clients do more analytics in less time, so they spend less time compiling analysis and more time performing analysis.

For more: www.factset.com/exposures.

 

 

–Chris Ellis, CFA, Director of Analytical Products, FactSet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Comments

you want to know your exposure to the companies that embody trends or your key insights. Single Name Security Exposures is a compelling complement to ex-ante risk analysis in that research.

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