How to Deliver Better Results With Portfolio Risk Analytics

Amid a constantly changing landscape, investment teams continue to face pressure to grow assets under management. However, piecing together vast amounts of data from disconnected platforms can drag out evaluation and conceal potential opportunities.

With powerful portfolio risk analytics, Morningstar Direct can help you save time and test your hypotheses faster. Quickly analyze the holdings in managed investments, models, ETFs, custom benchmarks, and client portfolios to uncover risk exposure and insights.

The return premia of factors like investment style or sectors shift with the markets. Still, investment teams can prepare portfolios for market moves by making informed decisions across the portfolio. Look-through analysis, for example, may expose concentrated portfolio exposure to factors that make you vulnerable to certain market conditions.

Direct’s clear, intuitive interface lets you roll up data across the portfolio and test how changing an investment or weighting would affect the overall portfolio. By understanding and managing risk exposure, it can be easier to improve performance and meet client expectations.

Here are key considerations.

Detailed, specific analysis of sector exposure can help analysts understand the risk sources in their portfolio and what levers to pull in market headwinds.

The consumer cyclical, communication services, and technology sectors unsurprisingly posted solid returns in the second quarter of 2024. Meanwhile, healthcare and basic materials struggled with the latter as the only sector to post a loss for the year.

And the Magnificent Seven stocks—Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—continued to ride high last year. The 2024 return nearly doubled that of the broad index, with the second and fourth quarters of the year as key separators.

How can Morningstar Direct help? If the balance of your asset allocation is tipped by factors like sector trends, portfolio risk analytics help reveal rebalancing opportunities. Within the application, investment teams can select their preferred portfolio rebalancing frequency and time period.

After a period of weakness for the US currency, the euro hit a four-month high against the dollar at USD 1.0844 this year. While the US dollar is still the world’s currency in 2025, expectations are high for the dollar to lose its leading reserve currency status in the next five to 15 years.

How can Morningstar Direct help? Morningstar Direct's Risk Model and Scenario Analysis tools empower investment teams to evaluate currency exposures and regional risks effectively. The Morningstar Global Risk Model offers a robust solution for objectively comparing portfolios and benchmarks—teams can craft custom market scenarios, perform what-if analyses, and assess portfolio exposures.

Meanwhile, the Scenario Analysis tool provides deeper insights into model portfolios, testing how funds or assets might perform under historical market conditions if similar events were to occur.

Bonds are particularly sensitive to shifts in interest rates. When interest rates rise, bond prices generally fall—leading to potential losses for bondholders. And with the Federal Reserve cutting its short-term rate three times in 2024, the backdrop may be supportive for more positive returns if interest rates continue to fall.

We also project US interest rates to fall faster than the market. Our forecasts for the federal-funds rate are well below market expectations, growing into a nearly 2-percentage-point gap by early 2027. Additionally, the European Central Bank cut its key interest rate by another 0.25 percentage points to 2.50% while the Bank of England has held the interest rate high at 4.50%.

How can Direct help? Use look-through analysis to find the full impact of holdings and positions in your portfolios. You can group holdings to assess interest-rate exposure, discover how trimming positions could affect returns, and more.

Portfolios heavy in hedge funds, options contracts, stock futures, and other illiquid assets make it difficult to sell assets on short notice for a reasonable price.

When analyzing a fund’s liquidity profile, investors should consider both volume and ownership statistics—low levels of daily volume can make handling flows challenging, while high ownership in single companies creates single-stock blowup risk.

How can Morningstar Direct help? Investment teams have the ability to create tailored presentations in Direct’s Presentation Studio. Direct’s extensive databases and versatile charting and reporting tools enable clearer and more impactful communication around the data driving investment recommendations.

International diversification doesn’t always reduce risk, especially if it means investing in the same style or sector. Risk modeling helps teams understand the real-time return premia associated with investment risk factors.

Over the past 15 years, the Morningstar Emerging Markets Index, which includes more than 3,500 stocks—largely from Asia and Latin America—has registered disappointing returns. The lagging performance is both a story of US exceptionalism and emerging-markets weakness.

How can Morningstar Direct help? The Revenue Exposure Snapshot in Morningstar Direct's Risk Model allows investment teams to evaluate the risk and return of asset classes across regions. This insight is crucial for designing portfolios that align with varying risk levels.

The right tools can help your investment team streamline processes and enhance portfolio performance. Morningstar Direct makes it easier to build, edit, and analyze portfolios—in one place, you can look through individual holdings and roll up exposure across the portfolio.

Fine-tune asset allocations, sector exposure, and style-box positioning to bring your investment vision to life. The comprehensive combines attribution with the deep, broad funds and competitive analysis data you trust from Morningstar.