Our new credit rating module is a great addition to our product suite, sitting alongside our standard model to enable in-depth analysis of the impact of credit risk and investment strategies on investor objectives.
The increasing importance of credit risk analysis
Credit risk plays an increasingly important role in investment decision-making and risk management for institutional investors. For example, insurance companies can benefit from lower capital requirements if their asset and liability cash flows are well matched. However, to achieve attractive returns for stakeholders during this continued low yield environment, an insurance company may choose to take on more credit risk within their portfolios – but this will have a negative effect on the matching of the assets and liabilities. In addition, more mature defined benefit pension plans want to track how their asset and liability cash flows evolve over time, yet still keep generating enough return to improve their financial position. Meanwhile, the economic impact of the pandemic warrants careful monitoring of the development of the downgrade risks in debt portfolios across multiple investment horizons.
Therefore, a credit risk scenario model is a powerful tool to support investment decision-making and risk management needs.
Our new credit rating transition module
Our credit risk scenario modeling offering extends with this module. Our existing corporate bond benchmark scenario model is well suited for the case of periodic rebalancing to specific rating and maturity distributions for well diversified portfolios. With the functionality provided by our new credit rating transition module, it is now also possible to simulate accurate and realistic real-world scenarios of buy-and-hold and buy-and-maintain corporate bond portfolios, and to analyze in detail the potential impact of credit risk on the rating composition, cash flows and returns of such portfolios.
In this paper, we discuss the methodology and features of our new credit rating scenario model and provide an example of the valuable results that it can generate.
Why stocks could be in the red this year and what to do about it
It hasn’t been since 2000 and 2001 that U.S. stock markets lost money in two consecutive years, but it’s something that could potentially happen again this year. Ortec’s modelling is pointing to negative equity returns over the next 12 months as the most likely market scenario. Pension funds with tactical or dynamic allocations at their disposal may want to temper their risk and consider fixed income instead.
Ortec Finance discusses with Responsible Investor on why high-quality climate data is essential for investors to map progress toward emission reduction goals and enable a successful transition to net-zero.
The Railways Pension Scheme is one of the UK’s largest and longest established pension funds. Our client case story highlights how we’ve enabled Railpen to take a holistic view of investments across multiple asset classes through our partnership with Burgiss.