Why does Portfolio Manager invest into HR loans with conservative strategy?

Our investors have sometimes asked from us – why does the Portfolio Manager invest into loans with HR rating although they have chosen a conservative strategy for their portfolio? We decided to shed some little light on this matter by explaining the basic logic of how the Portfolio Manager tries to achieve the Expected Return set by the chosen strategy.

The first important notion about the Portfolio Manager is that it needs data to make decisions on how to invest. The more historical data it has, the better it knows what loans to target. When the investor has chosen a certain risk-return strategy, the Portfolio Manager starts investing into loans that are most suitable to achieve that target.

Achieving the Expected Return target

For every loan, we calculate its Expected Loss (according to the current Rating model). Across all loans in the portfolio, the system calculates a current Expected Loss and Return. Now that the Portfolio Manager knows the risk profile of the whole portfolio and the target Expected Return, it can decide which loans available in the market would best help achieve that chosen Expected Return.

When the current Expected Return of the portfolio is lower than the target Expected Return, the Portfolio Manager may target loans with higher risk profile than what investor has previously chosen. This is why some investors with conservative investment strategy may see their Portfolio Manager investing into HR loans because it is trying to level the portfolios current Expected Return with target Expected Return.

In the case when current risk profile of the portfolio gets higher than the target Expected Return, the Portfolio Manager again will try to steer the current risk profile towards the chosen Expected Return target and in doing so may invest into loans with lower Expected Loss rate. But this does not mean that Portfolio Manager will not invest into HR loans anymore. It may still do it when the Expected Loss rate of the HR loan is lower than risk profile of the whole portfolio.

Recent and upcoming changes related to Portfolio Manager

As we said in our yesterday’s post, there will be changes to Portfolio Manager that will also affect this logic. The main takeaway from the improvements is that the Portfolio Manager will only make bids into loans that have lower or equal risk profile than the risk profile of that investors whole portfolio. Also that bids will be made into loans that have higher risk profile only when making the investment does not change risk profile of the whole portfolio.

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