Managing Investment Risk

Our investment risk management framework is focused on the following three risk categories: market, concentration (including credit and counterparty) and liquidity. The main portfolio risk constraints, such as the active risk budget, are approved by the University administration and various committees, including the Investment Committee. We incorporate these limits into our processes to ensure that any risk we assume to earn returns in excess of the Reference Portfolio is managed in a thoughtful and efficient manner. To that end, we manage the risk of the Endowment portfolio, for example, against the University’s specified active risk budget and incorporate several limits on exposure, concentration and liquidity.

At UTAM, we believe it’s important to assess risk using different lenses. Insights gained from different risk angles help us to better monitor and manage each portfolio’s forward-looking risk profile. This multi-faceted strategy is the anchor of our investment risk framework.

The following sections provide an overview of our approach for the Endowment portfolio.

Using a third-party holdings-based risk system, UTAM identifies, measures and monitors a variety of risks –  either on a point-in-time basis (e.g., as of December 31) and on a trend basis (i.e., over time). A combination of available investment holdings and proxies (where holdings are not available) is loaded into the risk system to facilitate the analysis.

Once we’ve populated the risk system with holdings and proxies, we measure active, or relative, risk (i.e., portfolio risk versus Reference Portfolio risk) and total, or absolute, portfolio risk (i.e., the absolute level of risk in the portfolios). In both cases, we identify specific risk contributors by asset class, investment strategy, investment manager and position. We also monitor the exposures of the Endowment portfolio to different sectors, geographical regions and credit-rating categories.

We assess the sensitivity of the investment portfolios to potential changes in market risk factors such as equity market shocks, shifts in interest rates and credit spreads, and adverse movements in foreign exchange rates. We also run the portfolios through historical stress periods such as the 2008 global financial crisis and the 2020 COVID-19 pandemic. These analytics are integrated through simulation analysis to assess, quantitatively, the possible portfolio impacts and sensitivities to different capital market regimes and scenarios. We also have the capability to run our own asset liability modelling using a dynamic scenario generator. This allows us to analyze the behaviour of the assets and liabilities of the Endowment portfolio across different plausible forward-looking scenarios and over multiple business cycles.

Overall, our analysis provides insights into key risk exposures and identifies markets, factors and regimes to which the Endowment portfolio is most vulnerable. The output of this analysis is discussed at regular meetings of our Management Investment Risk Committee and informs our decision-making on how these risks should be managed going forward.

ESG and climate risk analysis is integrated within our market risk analysis. We take a two-fold risk measurement approach, looking first at country and sector exposures and then supplementing that analysis with specific scenario-based tests.

In monitoring sector (or country) exposures to ESG risks, we employ several data sources (e.g., MSCI ESG industry risk intensity scores). These allow us to view the risk profile of the portfolios using different lenses. For climate risk in particular, we use risk indexes and scores that capture a country or sector’s current state and its readiness to adapt to a low-carbon economy. These metrics, which can be connected back to individual asset classes, provide information on which areas of the investment portfolios could be most susceptible to ESG and climate-based risk shocks on both a stand-alone and relative basis (i.e., relative to the Reference Portfolio).