How we identify and manage risk
Risk is managed rigorously throughout the investment process.
Credit risks are managed by the dynamic, continuous implementation of our disciplined bottom-up investment process, as described above. Primary credit risks include default risk, negative event risk and environmental, social and governance (ESG) risk.
Portfolio risks are managed with continuous, top-down portfolio processes. Primary portfolio risks include: concentration, trading liquidity, interest rate and volatility risks. Risk control metrics include maximum or minimum portfolio weights, monitoring variance from benchmarks, and risk models. Continuous implementation includes both manual, and systems-based monitoring and review.
Our minimum margin-of-safety standard is incorporated into a dynamic default-adjusted methodology, focused on the appropriate yield and spread necessary to overcompensate for the estimated default risk of each corporate credit investment. The methodology assigns every potential investment that meets our margin-of-safety requirements to one of four risk groups, dependent on the team’s estimation of its default risk, based on measures of i) excess asset coverage, and ii) its ability to generate free cash flow.