Quintin explains how trustees can use investment stress-testing to identify the weak points in a portfolio.
Professional accountants are frequently offered roles as trustees because of their expertise in managing accounts and their understanding of markets, as well as their trustworthiness and professionalism. But all this doesn’t necessarily make them experts in stress-testing their portfolios against risk.
In fact, this is a complex task. Conventional risk measures that you might be familiar with in your day job may not capture all portfolio risks, particularly under difficult market conditions.
Stress testing is associated with activities such as looking at the potential portfolio downside risk or methods that help estimate the expected response under difficult conditions. Stress tests are designed to determine an investment portfolio’s potential response to adverse developments so that any weak points can be identified early on and preventative action is taken.
With guidance, trustees may be able to determine the impact on portfolios and arrange for restructuring to limit the downside. Protecting portfolios from adverse consequences of extreme events is possible, and, in the process, trustees will have made an active contribution to fulfilling their fiduciary duties.
This paper forms a helpful introduction to practitioners and trustees less familiar with portfolio stress-testing.
A copy of this paper may be accessed from the ACCA’s Accounting and Business website here: ACCA Accounting and Business UK. Alternatively, a PDF may be downloaded from the link at the bottom of this page.
Q G Rayer (2017), Testing times, Accounting and Business, Pub. ACCA, UK Edition 04/2017, p24-25, April 2017.