Quantifying the risk in portfolios involves a complicated set of mathematical and methodology choices that we are always working to improve for our advisors. Today, we rolled out several adjustments to our methodology to enhance the performance of two key features — portfolio analytics and interest rate stress testing.
First, we made an adjustment to how we account for dividends in a portfolio. We now add dividends into expected return for each security after normalizing returns for the long term, to avoid the washout of dividend effects for low-beta investments.
For portfolios with high dividend-yielding funds or stocks, advisors will likely see a reduction of 2 to 4 points in the portfolio’s risk number. The largest drop we’ve seen — generally when portfolios are filled with low-beta, high-dividend investments — was 9 points on the Risk Number scale.
This is an exciting improvement that we believe will be even more accurate in showcasing the value advisors place on dividend yield in client portfolios.
Second, we made an adjustment to how we stress test portfolios for interest rate risk. We now use the last six months of returns to correlate the sensitivity of each individual security to that period’s movements in the ten year treasury rate.
Because we’re using tighter data points for interest rate stress testing, this improvement will increase the relevancy of the interest rate stress test for actively managed funds, the style drift of active managers and younger funds with less history. It will also more quickly reflect changes to Fed policy or movement in interest rates.
These two changes are a part of our constant efforts to make Nitrogen more effective for our advisors. If you have any questions about these adjustments, don’t hesitate to let us know. We love being a small part of your success!