In addition to the daily monitoring of statutory (German Investment Act and Derivatives Ordinance) and contractual investment limits, the securities funds' risk profile is monitored on a weekly basis with the aid of comprehensive stress tests.
The Derivatives Ordinance governs the monitoring of risks of investment funds that use derivatives (such as futures, options, structured products with option components).
Stress tests are a requirement prescribed by the Derivatives Ordinance and must be performed at least once a month. SEB Asset Management goes above and beyond the requirements, performing weekly stress tests on the funds in order to recognise undesired changes in the risk profile as early on as possible and, if necessary, to introduce measures to counter these changes. Moreover, stress tests are also performed on funds that do not contain any derivatives.
Stress tests reinforce the daily risk monitoring regime with statistical models that simulate potential – although unlikely – extreme situations on the capital market. By doing so, portfolio managers receive an indication of how they should act to efficiently manage risk in extreme capital market situations.
Stress tests are based on extreme scenarios in relation to all risk factors linked to a fund.
Risk factors
Risk factors are economic conditions which can have a positive or negative impact on the value of the fund if they change. These include share prices, exchange rates and interest rates.
The portfolio management monitors and maintains limits for stress test results independently of risk management. This is achieved primarily through monitoring the week-to-week changes in scenario results. The limits are set by management based on stress test scenarios.
If the week-to-week changes exceed a set limit, this may indicate a change in the risk profile or the fund composition. In this case, portfolio managers and risk management analyse such change. Depending on the result of the analysis, measures are introduced to mitigate risk.
