Investors are looking for better fixed income outcomes in an uncertain market environment. As we think about risk, downside protection, and total return, we’ve asked the head of our Fixed Income Risk Analytics group, Ryan Huckstorf, to explain our risk management process at Wells Fargo Asset Management (WFAM) and why it matters to our investors.
Laurie King: I’m Laurie King, and you are listening to On the Trading Desk®.
This conversation highlights key aspects of how our Fixed Income Risk Analytics team works with our portfolio management teams, providing investment oversight that complements each team’s embedded risk management efforts and also makes portfolio risks transparent.
We’re talking with Ryan Huckstorf, Director of Fixed income Risk Analytics at Wells Fargo Asset Management. Welcome to the program, Ryan.
Ryan Huckstorf: Hi, Laurie. Thank you for the opportunity.
Laurie: Let’s begin by explaining to our listeners your role in risk management. And by that I mean, you manage the Fixed Income Risk Analytics group—so how does your team fit into the overall risk management infrastructure here at WFAM?
Ryan: So the Fixed Income Risk Analytics Team is a part of the broader investment analytics group, which is co-headed by John Hockers and Randy Mangelsen. And we report directly into the Global Chief Investment Officer, Kirk Hartman. We’re tasked with fixed income, equity, multi-asset class, and mutual fund risk analytics, which is what people typically think of when we talk about investment risk management. But we’re also tasked with a number of functional areas that provide investment team support. So these include counterparty and model risk, ESG risk analytics, portfolio construction research, as well as scientific learning.
Laurie: And I’ve heard you talk about the four levels of risk review.
Ryan: That’s right, Laurie. As I mentioned, our team reports directly into the office of the CIO and they’re ultimately responsible for making sure that our investment teams are investing in a way that’s consistent with client expectations.
So we serve as their eyes and ears with respect to the risks in our investment strategy lineup. Our team’s oversight process is further overseen by a Wealth and Investment Management risk oversight group, and that process is overseen by a Wells Fargo enterprise-level risk oversight group. These three risk oversight functions are ultimately overseen by our Wells Fargo internal audit team and, ultimately, by our industry regulators, as well.
Laurie: Now that we understand where your group fits within the overall risk process, let’s talk about what your fixed income risk team does. My first question: “What get measured gets managed”—what do you mean by that?
Ryan: So Wells Fargo Asset Management has invested considerable resources in risk analytics and intellectual capital. And what we mean by the phrase “What gets measured gets managed” is that we use these resources to provide a consistent, unbiased framework for evaluating investment risk to make all portfolio risks transparent to investment teams and senior management. Ultimately, this transparency leads to a culture of accountability, and we feel that that accountability, that culture that we’re building, leads to better client outcomes and more stable, more consistent risk-adjusted alpha for our clients.
Laurie: Another interesting point I’ve heard you make is that your team does its best to impel rather than compel portfolio managers. How and why do you do that?
Ryan: Yeah, it’s a great question, as our clients often ask us how what we do differs from a compliance function, and we’d like to make a clear distinction here. Compliance is tasked with compelling investment teams to adhere to client-mandated restrictions or regulatory guidelines. They have the authority to force an investment team to make a change with a portfolio to bring an exposure in line with those guidelines.
Our team doesn’t have the ability to directly mitigate an investment risk as compliance does, as that authority ultimately lies with our office of the CIO. We highlight risk exposures for the office of the CIO that we think may drive extreme benchmark or peer-relative performance and they ultimately decide whether or not that risk rises to the level of requiring risk mitigation.
For that reason, we like to say we impel, or we drive or urge a particular action forward, rather than compel.
Laurie: Another point I’ve heard you make that we don’t usually hear about risk is that you try to identify unintended risks in portfolios. How do you do that?
Ryan: Well, it’s a challenge, and it starts with our risk analysts. So each analyst on the team is responsible for providing risk oversight for specific investment teams. So over time they get to know the investment management process inside and out. They develop collaborative relationships with the investment teams that helps them gain additional insights into the investment process. We also use a combination of vended risk models and proprietary risk tools in addition to our proprietary fixed-income risk reporting system that helps provide a dynamic comprehensive view of risk that’s independent from the investment team’s view. And this view changes dynamically as the markets change. The analysts’ deep understanding of the investment process, given their collaborative relationship with the teams, as well as these quantitative tools, allow us to assess investment risks relative to our understanding of their process and identify exposures that may be inconsistent with their process or with the exposures intended purpose.
Laurie: Now because you have two-way communication with the portfolio management teams, do you find that they adjust their portfolios because of information you’ve provided?
Ryan: I think it’s important to note that our fixed-income investment teams are extremely risk disciplined, as risk management really has to be front and center in fixed-income investment management, just given the complexities in the fixed-income markets. In fact, they use many of the same metrics that we do on a day-to-day basis in the management of the portfolios. That being said, the investment teams have access to the risk reports we provide on a daily basis, and the data and analysis we provide serves to further inform the investment decision making process and, ultimately and hopefully, reduce the unintended risks in the portfolios as a result.
Laurie: So what’s it like day-to-day on the job? Is it pretty steady state with an occasional outlier that you notice? Or is risk always blinking hot?
Ryan: Well again, given the risk discipline nature of our investment teams, I would say it’s fairly steady state on a day-to-day basis, with the occasional outlier here and there. However, the analysts on my team are constantly evaluating the markets, the economy, and geopolitics to better evaluate the risk exposures within their strategies against that market economic geopolitical backdrop. We also provide information and analysis on an ad-hoc basis to senior management, portfolio management teams, and our clients. We get involved with the sales process through RFP responses and involvement in sales discussions and due diligence meetings. We’re also continuously improving our risk tools and processes. We want to stay ahead. Obviously, the market is rapidly changing and we need to rapidly change, or be in a position to be able to rapidly change our risk processes, as a result of that dynamic environment.
Laurie: That’s all the time we have for this episode, and thank you, Ryan Huckstorf, for helping us understand and making it more tangible for the listeners.
Ryan: Thank you, Laurie, and again, I appreciate the opportunity to shed some light on our process.
Laurie: For our listeners, if you’d like to learn more about our fixed income solutions or find topical insights, go to http://on.wf.com/6121EL3X5 to learn more. Until next time, I’m Laurie King; take care.