Concentration and Exposure
See where a portfolio's money and rate risk sit, by issuer, sector, rating, maturity bucket, country and currency, how much of its duration each group contributes, how concentrated it is, and whether it keeps to the limits of an investment policy statement.
Learning focus: diversification in credit portfolios, and reading an investment policy statement.
A sample credit portfolio with fictional issuers; prices are set from illustrative yields. Semiannual coupons, ACT/ACT. Sector “Government” is exempt from the issuer and sector limits.
Illustrative rates; values and DV01s are converted to US dollars. Currency hedging is not modelled.
| Policy | Limit | Portfolio | Status |
|---|---|---|---|
| Largest issuer (governments exempt) | ≤ 10.0% | 16.5% Northwind Utilities | Breach |
| Largest sector (government exempt) | ≤ 30.0% | 16.5% Utilities | Within |
| Below investment grade or unrated | ≤ 10.0% | 8.7% | Within |
| Not in USD | ≤ 20.0% | 15.2% | Within |
| Outside US | ≤ 25.0% | 20.7% | Within |
| Modified duration | 4.0 to 7.0 | 4.83 | Within |
| Issuer | Positions | Value | Share | DV01 | Share of DV01 | Duration contribution |
|---|---|---|---|---|---|---|
| US Treasury | 2 | 3,007,380 | 33.1% | 1,189 | 27.1% | 1.310 |
| Northwind Utilities | 2 | 1,500,825 | 16.5% | 891 | 20.3% | 0.981 |
| Germany | 1 | 749,415 | 8.3% | 655 | 14.9% | 0.722 |
| Contoso Bank | 1 | 700,973 | 7.7% | 194 | 4.4% | 0.214 |
| Woodgrove Bank | 1 | 632,701 | 7.0% | 229 | 5.2% | 0.252 |
| Fabrikam Industrial | 1 | 601,524 | 6.6% | 305 | 7.0% | 0.336 |
| Litware Telecom | 1 | 596,220 | 6.6% | 377 | 8.6% | 0.415 |
| Adatum Energy | 1 | 501,095 | 5.5% | 219 | 5.0% | 0.241 |
| Tailspin Airlines | 1 | 398,612 | 4.4% | 138 | 3.2% | 0.152 |
| Proseware Retail | 1 | 394,336 | 4.3% | 187 | 4.3% | 0.206 |
Value and risk are not the same thing: the 7–10Y bucket is 22.5% of value but 35.8% of DV01, because longer bonds move more for each basis point. The average rating of A hides the tail: 8.7% of the portfolio is below investment grade or unrated, and that is where defaults come from. An issuer Herfindahl of 0.170 is as concentrated as 5.9 equal-sized issuers; across the credit holdings alone it is 6.4. Investment policy statements cap single issuers because one default should cost the portfolio no more than it can absorb.