Understanding Investing

The Benefits of Risk Factor Investing

Steve Sapra, senior member of the client solutions and analytics team, explains how a focus on risk factors can simplify investors’ ability to assess the risk/return profile across asset classes and sectors.

More from this section

Read Transcript

Justin Blesy, Asset Allocation Strategist, PIMCO:In the last five years, we've had, you know, very low volatility environment. You can almost be lulled into sleep about forgetting about the potential downside of these portfolios.

So, so Steve, maybe to start us off, how do we think about kind of building in, uh, some of these stress scenarios into the way we construct portfolios?

Steve Sapra, Client Solutions & Analytics, PIMCO:One thing maybe I'll address first is, is complacency, and this sort of gets to some of the kind of behavioral issues.

You know, if you look at kind of what market volatility has been like for the last five or so years, it's actually been relatively low, certainly low by, by historical standards. And this is exactly the type of environment where investors can get complacent. You know, "Why am I not keeping up with the S&P 500?" You know, "Maybe I need to take more risk."

And this is why we utilize, actually, very long-term volatilities, 20-plus-year volatilities when we construct, uh, when we construct our model portfolios.

If you think about the last 20 years, there's a lot of stress periods in there. Obviously, everyone is familiar with 2008. There was a recession in 2001. There was the Asian financial crisis, the Russian financial crisis, the dot com bubble. There's been a number of stress periods.

And so, when you, when you build portfolios based upon long-run volatilities, typically you get more conservative portfolios, given the objective.

In terms of stress testing, this is another way to look at risk. You know, sort of the traditional academic way is standard deviation. But, but there's obviously other ways to look at risk too, and one of those is stress testing. And stress testing entails decomposing the portfolio into its constituent risk factors and seeing how those risk factors would have performed in historical stress periods, say the 2008 financial crisis, maybe the taper tantrum when interest rose—interest rates rose dramatically during the second half of 2013.

So, you want to look at risk, uh, in multiple ways, not just things like standard deviation or volatility, which most people do, but also get some idea about how the portfolio would be expected to perform under kind of different historical stress periods.

Justin: Maybe, uh, maybe for Mary and Mark — You know, and Mark, you mentioned it was a shock to clients — but what do you do with that information once you have it and you see what the portfolio could do in these different market environments?

Mark: Yeah. quite often it's a pretty eye-opening experience for advisors when they see it. And really, then, how do you communicate that appropriately to your client? So, with the home offices are trying to provide both the tools and then the, the mechanisms to allow for that, to facilitate that conversation. Is it an adjustment in the allocation? Is it thinking about their withdrawal rates differently? Is it thinking about tax management or planning a little bit differently?

So there's a lot of, uh, conversations that really jump off. As, as Mary sort of mentioned, it really starts with that plan. And it's always, if your home base is that financial plan, then you can adjust the portfolio, you can change in and out of strategies, you can outsource to solution providers much easier because, again, the objective is trying to meet the plan and the goals of the, of the client's plan.

Mary: And that modeling also helps train the client. Most of these home offices have, equipped their advisors with some really good, uh, financial planning software that employs stochastic modeling.

And so, the conversation becomes, "What does this portfolio behave like through sustained great markets or sustained bad markets or normal markets?" And advisors, the good ones I work with, really hone in on those sustained bear markets. And can we still meet the goal? What is the probability of success if your portfolio had to endure these sustained down markets?

And so, if the answer is yes, great. But when those things happen, the, the traditional emotions come through, but the advisor can go back and say, "Remember, we had this conversation, and look, everything's still on course, stay the course."

So the financial planning modeling is the science, but the art — and this is where advisors do, in fact, earn their fees — the art is holding the hands of the client even with the numbers in front of them that say, "You're going to be okay." And advisors are getting much better at training clients.

I just did a panel of advisors this week about that, and the market was very volatile. The question from the audience was, "Your phone must be ringing off the hook because of the crazy markets." And every advisor on the panel said, "No, not at all. We've trained our clients to expect this. Their plans can ride through it. And it's one day of volatility. And if that one day turns into one week, we might get one or two phone calls."

So, it's been an interesting engagement to watch advisors really evolve their way they do business with clients.

For more insights and information, visit pimco.com



All investments contain risk and may lose value. Investors should consult their investment professional prior to making an investment decision. 

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. 


Filters: Reset All


Close Filters Dropdown
  • Tags


  • Category


    Bond by Bond
    Economic and Market Commentary
    Investment Strategies
    PIMCO Foundation
    PIMCO Education
    View from the Investment Committee
    View From the Trade Floor
  • Order By


    Most Recent
() filters applied

Multimedia Finder

Filter By:
  • Bond by Bond
  • Careers
  • Economic and Market Commentary
  • Investment Strategies
  • PIMCO Foundation
  • PIMCO Education
  • View from the Investment Committee
  • View From the Trade Floor
  • Viewpoints
  • Understanding Investing
  • A
  • B
  • C
  • D
  • E
  • F
  • G
  • H
  • I
  • K
  • M
  • N
  • P
  • Q
  • R
  • S
  • T
  • W
  • Z
Berdibek Ahmedov
Product Strategist, Equities and Multi-Asset
Joshua Anderson
Portfolio Manager, Income and Asset-Backed Securities
Del Anderson
Credit Analyst
Robert Arnott
Founder and Chairman, Research Affiliates
Andrew Balls
CIO Global Fixed Income
Justin Blesy
Asset Allocation Strategist
Meredith Block
ESG Research Analyst
Philippe Bodereau
Portfolio Manager, Head, Credit Research Europe
Allison Boxer
David L. Braun
Portfolio Manager
Jelle Brons
Portfolio Manager, Global and U.S. Investment Grade Credit
Nathaniel Brown
Director of the PIMCO Foundation
Erin Browne
Portfolio Manager, Multi-Asset Strategies
Esteban Burbano
Fixed Income Strategist
Grover Burthey
Portfolio Manager, ESG
Libby Cantrill
U.S. Public Policy
Kenneth Chambers
Fixed Income Strategist
Stephen Chang
Portfolio Manager, Asia
Devin Chen
Portfolio Manager, Commercial Real Estate
Richard Clarida
Global Economic Advisor
Mathieu Clavel
Portfolio Manager, Alternative Credit
Tony Crescenzi
Portfolio Manager, Market Strategist
Josh Davis
Global Head of Risk Management
Laura Deneke
Sr. Vice President, Product Strategist
Pramol Dhawan
Portfolio Manager
Devin Ekberg
Senior Consultant, Advisor Education
Joachim Fels
David Fisher
Co-Head of Strategic Accounts, U.S. Global Wealth Management
David Forgash
Portfolio Manager
Preeyam Gandhi
Max Gelb
Product Strategist
Nick Granger
Portfolio Manager, Quantitative Analytics
Adam Gubner
Portfolio Manager, Distressed Debt
Gregory Hall
Head of U.S. Global Wealth Management
Mary Hoppe
Account Manager
Ray Huang
Portfolio Manager, Real Estate
Daniel H. Hyman
Portfolio Manager
Daniel J. Ivascyn
Group Chief Investment Officer
Mark R. Kiesel
CIO Global Credit
Erica Kinsella
Product Strategist, ESG Strategies
Sean Klein
Head of Client Business Strategy – Client Solutions and Analytics
Kristofer Kraus
Portfolio Manager
Nicola Mai
Portfolio Manager, Sovereign Credit Analyst
Raji O. Manasseh
Equity Strategist
Samuel Mary
ESG Research Analyst
Kyle McCarthy
Alternative Credit Strategist
Mohit Mittal
Portfolio Manager, Multi-Sector
Alfred T. Murata
Portfolio Manager, Mortgage Credit
John Murray
Portfolio Manager, Global Private Real Estate
John Nersesian
Head of Advisor Education
Roger Nieves
Rick Pagnani
Head of Insurance-Linked Securities
Sonali Pier
Portfolio Manager, Multi-Sector Credit
Gavin Power
Chief of Sustainable Development and International Affairs
William Quinones
Product Strategist
Lupin Rahman
Portfolio Manager
Graham A. Rennison
Quantitative Portfolio Manager
Libby Rodney
Steve A. Rodosky
Portfolio Manager
Emmanuel Roman
Chief Executive Officer
Steve Sapra
Senior Advisor
Jerome M. Schneider
Portfolio Manager
Marc P. Seidner
CIO Non-traditional Strategies
Emmanuel S. Sharef
Portfolio Manager, Asset Allocation and Multi Real Asset
Greg E. Sharenow
Portfolio Manager, Commodities and Real Assets
Candice Stack
Head of Client Management, Americas
Kimberley Stafford
Global Head of Product Strategy; Responsible for Sustainability Oversight
Cathy Stahl
Global Head of Marketing
Jason R. Steiner
Portfolio Manager, Private Lending and Opportunistic Strategies
Christian Stracke
President, Global Head of Credit Research
Geraldine Sundstrom
Portfolio Manager, Asset Allocation, EMEA
Richard Thaler
Distinguished Service Professor of Economics and Behavioral Science at the University of Chicago's Booth School of Business
Jessica K. Tom
Senior Credit Analyst
François Trausch
CEO and CIO of PIMCO Prime Real Estate
Jerry Tsai
Client Solutions and Analytics
Matt Tuten
Portfolio Manager
Megan Walters
PIMCO Prime Real Estate
Qi Wang
CIO Portfolio Implementation
Jamie Weinstein
Portfolio Manager, Corporate Special Situations
Paul-James White
Portfolio Manager
Tiffany Wilding
Andrew T. Wittkop
Portfolio Manager, Treasuries, Agencies, Rates
Jerry Woytash
Portfolio Manager, Short-Term Desk
Kirill Zavodov
Portfolio Manager
Mike Cudzil
Portfolio Manager
Seray Incoglu
Portfolio Manager, Commercial Real Estate
Ben Bernanke
Chair, Global Advisory Board
  • Alphabetical
  • Most Recent
Section : Date : Experts :
Reset All
Sustainable Development Goals at PIMCO
Forecast Favors Fixed Income
Positioning Portfolios for 2024
The Hard Truth About Soft Landings
Higher Yields Today Create Opportunity
Specialty Finance: Seize Today’s Compelling Entry Point

Load more results Load {{cCtrl.fetchResults}} more results