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Evaluate impact across your whole business, for a specific client, or a single account
Stress testing is not just for individual accounts. With the right capabilities, firms can conduct stress tests across their entire enterprise, while advisors can assess the implications of market movements across clients’ whole portfolios, including accounts held away. Identifying which portfolios may deviate from intended goals is an important mechanism to focus your advisors’ conversations with clients and prospects as well as to enhance your firm’s oversight process. The Aladdin Wealth platform lets you do that at each level of your organization.
Address a variety of needs, flexibly
Stress testing plays an important role in identifying and explaining the risks and opportunities introduced by market events, for advisors as well as your broader enterprise. When assessing investment risk at the portfolio level, advisors can use stress testing to understand the impact of events on clients’ goals and build trust through more effective communications. When looking at risk across your entire business, stress testing portfolios in aggregate can help you determine where to focus and align teams across your organization to solve for any associated business risks. Here are a few examples of where stress testing can help:
Replay historical events or test a new hypothesis
With the Aladdin Wealth platform, you can validate your thinking across a range of possible scenarios. Our industry-leading risk models let you analyze current portfolio composition and exposures against historical events as well as a variety of market factors.
Historical events
Access scenarios that occur over a specified date range, such as the 2008 financial crisis
The Aladdin Wealth stress testing capability shows a ‘replay’ of historically stressful periods to assess the implications for today’s portfolios. Since portfolio exposures change over time, it is critical to take into account current portfolio holdings and exposures (i.e. sensitivity of the current portfolio to fundamental drivers of risk and return) instead of relying on analyses that use the realized returns of the portfolio at the time of the historical event, which by definition uses the portfolio composition and exposures in that historical period.
By incorporating current exposures, the Aladdin Wealth platform provides a more accurate picture of the current portfolio’s sensitivity to scenarios and how those scenarios may react to similar future market events. For example, when we ‘replay’ the Global Financial Crisis on the S&P 500 index, we take into account how the composition of that index has changed and evaluate the results based on its current composition. This means the results are based on our expectations of the future instead of how it actually performed historically.
Source: BlackRock Solutions. Data as at 31 March 2020. Scenario Time Range: Jul 31, 2007 to Mar 9, 2009. Scenario risk parameters: 120 monthly observations, constant-weighted.
References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.
Hypothetical market events
Test your hypotheses by shocking one or multiple factors
Sometimes your concerns don’t mirror past events. The Aladdin Wealth platform lets users select hypothetical scenarios and test multiple variables -- with a high degree of flexibility -- to show the range of outcomes that could occur. This allows you to simulate various magnitudes and directions of shocks to equity markets, credit spreads, interest rates, commodity prices, or foreign exchange rates based on current correlations. By doing this, you can simulate the portfolio impact from a variety of local, global market or macro events. For example, what will happen to portfolios if the S&P 500 index and U.S. interest rates were to increase or decrease by 10% and 1% respectively, oil prices were to increase or decrease by 10%, or the U.S. dollar were to strengthen versus the Euro? This kind of hypothetical, multi-variable stress testing helps you understand the range of potential future outcomes.
For illustrative purposes only. Portfolio represents hypothetical “aggressive” portfolio compared to equity benchmark.
The power of stress testing
Risk can be complicated to explain to clients, but managing risk is absolutely critical to helping clients achieve their goals. Stress testing is a powerful and intuitive way to connect with clients and show them what happens under different historical or hypothetical scenarios.
The Aladdin Wealth platform’s stress testing functionality helps at all levels of your business. It gives advisors a clear picture of clients’ portfolios to help align them for the road ahead. This visibility reduces the sense of uncertainty and builds trust when communicating with clients. Stress testing also positions your firm to act quickly – at scale across your entire business – when responding to market, regulatory or compliance-oriented events. Get in touch with us to learn how Aladdin Wealth can help support your specific business needs.
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