In-house System of the Year - Point, Lehman Brothers

Compared with their colleagues in equities, fixed-income portfolio managers have had relatively few third-party analytics available to them, especially those that encompass both risk and performance attribution. Of those that exist, the Point portfolio analytics tool from Lehman Brothers stands out for the breadth of its coverage and depth and quality of its functionality.

When it launched Point in 2000, Lehman Brothers already held a commanding position in fixed income through its indexes - the benchmark of choice for asset managers around the globe. The historical price data on the 200,000 or so assets that comprise the indexes gave the firm a head start when developing its global risk models - systems that decompose risk into a number of intuitive factors, such as currency, yield curve, inflation, volatility, credit and spreads.

In addition to major generic factors, a good risk model needs to capture the specific factors that drive particular segments of the market. For example, credit portfolio managers need a risk model that determines systematic credit factors, as well as harder-to-model elements such as idiosyncratic risk, issuer default risk and the correlation between defaults. Lehman Brothers offers just this sort of specific factor analysis. However, the bank hasn't rested on its laurels. It has continually looked to keep the system up to date, with recent additions including the introduction of a new duration time spreads model, which regards current credit spread levels as the best measure of forward-looking spread volatility. Another recent development is a simulation-based tail risk model, which conducts value-at-risk and expected shortfall analysis on portfolios with non-linear returns, such as those containing collateralised debt obligations and swaptions.

"We simulate the entire profit and loss distribution of a portfolio versus a benchmark, including all the correlations," says Lee Phillips, London-based head of marketing for Point in Europe at Lehman Brothers. "And because we have the full distribution, portfolio managers can pull out risk measures such as value-at-risk and expected shortfall, which allow clients to see the impact of the worst 1% of returns, for example."

Lehman has also recently improved the infrastructure of Point to make it more flexible, enabling clients to map risk decomposition to their investment process. Frederick Bourgoin, London-based senior fixed-income quantitative researcher at global asset manager Schroders, says the ability to tailor risk reports to the investment process is invaluable: "Now you can get out information ratios for strategies for various types of risk, such as interest rates, credit and foreign exchange. So you can say excess return in rates has been X, volatility has been Y over the course of time and the information ratio ex poste is Z. And you can do the same thing for credit and foreign exchange. That is how you want to be able to do things."

Portfolio managers not only want to know where the risks actually lie, but also where their returns are really coming from. This is where Point has been making enormous strides. Clients say the system's performance attribution model really sets it apart from the competition - and it has helped Lehman Brothers win some significant contracts with clients.

The model analyses the factors that contribute to outperformance versus a benchmark, enabling users to get greater perspective on their investment decisions and how they have affected returns. The performance attribution function is compatible with the risk model. "We decompose returns into relevant factors, which allows clients to slice and dice the results so they fully understand how their investment decisions have or have not contributed to outperformance," explains Phillips. "Clients use the risk model to allocate their risk budget and the performance attribution model to monitor how these risks paid off."

Bourgoin says many other fixed-income performance attribution applications have been built on equities performance attribution frameworks, which has limitations. "Lehman is a fixed-income house by nature, so it has built its performance attribution model correctly from the ground up, stripping out credit risk, for example, which is not easy," he adds.

Lehman Brothers now has more than 200 clients using Point, with a large proportion using both the risk and performance attribution tools. The bank has now begun pitching the performance attribution functions in competition with specialist software houses such as California-based MSCI Barra and Wilshire Associates, as well as other banks, winning three major clients over the past year.

Over the past 12 months, Lehman has been adding equities to Point, and now covers around 60,000 global stocks. This opens up the system to a new range of clients, particularly multi-asset investors such as insurance companies and pension funds. The bank has been working with these types of client to analyse their assets versus their liabilities, and provide tools to optimise portfolios. It is this kind of steady innovation and development that is keeping Point ahead in the market-place.