Risk Management Takes Art and Science.

RiverFront’s momentum and valuation disciplines (our Art and Science) set overall investment strategy, while our risk management processes seek to ensure that these strategies are both appropriate and successful.  We divide risk management into Proactive and Reactive components.  Proactive risk management allows RiverFront to ensure that complex portfolios with multiple asset classes maintain risk levels consistent with client risk tolerance and our overall investment strategy.  Reactive risk management forces our investment team to continually examine those investment strategies and ensure that the market is validating our investment thesis, or to take action when it is not.  The combination of these two risk disciplines brings both Art and Science to the RiverFront risk management process.

Proactive Risk Management

RiverFront portfolios span multiple asset classes with very different risk characteristics (conservative dividend stocks, more aggressive emerging markets equities, high quality bonds, commodities, etc.).  To understand the overall risk level of such diverse portfolios, we build proprietary mathematical models based upon the historical risk characteristics of the various asset classes within our portfolios.  These models quantify both the relative risks of these asset classes and the extent to which those risks tend to augment or offset one another (the correlation of risks).  For example, through these models we can understand the risk impact of increasing our stock weighting by 3% or reducing our high yield bond positions by 5%.  These Proactive risk management processes ensure that the risk within each of our portfolios aligns with both client risk tolerance and our current investment strategy.

Reactive Risk Management

Reactive risk management is designed to force RiverFront portfolio managers to recognize and acknowledge investment mistakes.  For all the diligence and care that goes into our investment strategies, we are not perfect; and we will inevitably make mistakes in our investment decisions.  The key to long-term success, in our view, is to recognize our mistakes and take action to correct them as quickly as possible.  Our Reactive risk management processes measure and monitor the performance of our investment strategies and alerts portfolio managers to specific strategies or investments that are not performing as expected.  Since admitting mistakes tends to be difficult for most people, we minimize the impact of emotion on the decisions we make by having a dedicated Risk Manager identify underperforming strategies and ensure that risk management actions are taken.  Underperforming strategies are subjected to a re-underwriting process by the entire investment team.  Often, this re-underwriting results in the Risk Manager taking action to reduce portfolio exposure.