SCR Calculator User Manual

The 'Settings' Tab

The 'Settings' tab contains crucial parameters and controls for optimisation. It is divided into several mandatory or optional sections. See below screenshot:

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• Populate Populate all the input boxes in this tab. Their default values are usually the current portfolio's values.
• Clear Clear all the input boxes in this tab.
• Save Save all the input values in this tab into a "Settings" spreadsheet.
• Load Load a "Settings" spreadsheet to populate all input boxes in this tab.

The user must select one from the four options given:

• Maximise Yield-to-Worst This is the most common objective of fixed income portfolio optimisation.
• Maximise OAS Option-adjusted spread is a more meaningful objective than yield if liabilities are discounted at risk-free swap curves or government bond curves.
• Minimise Turnover Useful when the user sets a minimum yield that is higher than the current portfolio's yield level, while setting this objective.
• Other This is a versatile option for setting an objective based on a customised field. For instance,
  • If the user has included a 'book yield' column in the inputsheet, this column can be set as an objective for maximisation, and the 'Weighted Average of' should be selected.
  • If the user wishes to maximise ESG scores, the "ESG Score" column (the user must have included this column in the inputsheet) can be set as an objective for maximisation, and the 'Weighted Average of' should be selected.
  • If the user wishes to maximise cashflow in a certain year, cashflow in that year must be generated as an additional column; and the 'Proportional Sum of' should be selected.
  • If the user wishes to minimise realised gain for tax purposes, the "Unrealised Gain/Loss" column can be set as an objective for maximisation, and the 'Proportional Sum' should be selected.

This section contains two important boxes:

• Min Total Weight % and Max Total Weight % Default value 100% for both. These two boxes are for setting a range for the final, optimised portfolio size, measured against the current portfolio. They can be used in different ways:
  • Under normal circumstances, if you wish to keep the current portfolio size unchanged, keep them both at 100%.
  • If you wish to increase/decrease the size of the current portfolio to a definite clearcut level, enter a consistent value in both boxes, e.g. 120%. (Note in that case then the resulting optimised weights will sum up to this number rather than 100%.)
  • If you are searching for a minimal-sized portfolio that can provide some required cashflows (see the "annuity cashflow matching" section of this chapter for more details), but unsure whether the current portfolio size is too large or too small for the purpose, you can set a range using these two boxes, e.g. 60% and 120%. In this case, the optimiser will search from the lowest weight, at a stepsize equalling the gap between the two thresholds divided by the Steps input. Once it found the first portfolio that fulfills such requirements, it will report its weight in the End Weight % box (a read-only box populated upon successful completion of an optimisation).
• Max Turnover Default value 30%. Must be positive and below 100%. Turnover is measured as the percentage of current portfolio sold. New assets bought do not count towards turnover.

This section, although optional, contains the most common portfolio constraints, and the user should fill in as much as appropriate.

• Minimum Portfolio Duration and Maximum Portfolio Duration control the weighted-average duration band of the portfolio. Here 'duration' refers to 'Duration to Worst' column of the inputsheet. Default values are the current portfolio's average duration +/- 0.5.
• Minimum Maturity Date of Assets and Maximum Maturity Date of Assets apply to each asset in the portfolio. Default values are based on those of current portfolio assets.
• Minimum Portfolio OAS lower threshold on the weighted-average portfolio Option-adjusted Spread. Default value is the current portfolio's average OAS.
• Maximum Portfolio DtS upper threshold on the weighted-average portfolio Duration-times-Spread. Default value is the current portfolio's average DtS.
• Minimum Portfolio-Average Rating weighted-average rating at notch-level. Default value is the current portfolio's average rating.
• Minimum Rating of Each Asset self-explanatory. Default value is the lowest rating of all assets in the current portfolio.
• Maximum Non-IG Assets Total Weight self-explanatory. Default value is this ratio of the current portfolio.
• Maximum Subordinated Assets Total Weight self-explanatory. Default value is this ratio of the current portfolio.
• Minimum Portfolio Yield-to-Worst self-explanatory. Default value is the curent portfolio YTW.
• Minimum Bond Price is used to filter out near-default bonds that often have very low price and very high yield, but not ideal candidates of investment. Default value is the lowest bond price in the current portfolio.

This section only works if the user has provided the Unrealised Gain/Loss column in the inputsheet. The sample inputsheet contains this column.

The current portfolio typically contains bonds at unrealised loss or unrealised profit. When rebalancing, the portfolio manager can optimise such P&L crystallisation for accounting objectives. This section provides a P&L target mechanism.

• Floor and Cap default values are the minimum and maximum amount of P&L crystallisation possible. The former is realised if only bonds at loss are sold. The latter is realised if only bonds at gain are sold. The user can enter a narrower range for the optimiser to target.

This section only works if the user has provided the optional Amount Outstanding column in the inputsheet. The sample inputsheet contains this column.

When investing in new assets, the amount oustanding represents market liquidity of a particular issue and is important. This section provides control mechanism to filter out too illiquid issues.

• Min Amount oustanding lower threshold of the amount outstanding, measured in millions.
• Max % A. O. Bought maximum percentage of any issuance's amount outstanding that can be bought within the portfolio.

• DM Country and EM Country allocation caps applicable on each DM/EM country.
• Sector Level 1,2,3,4 allocation caps applicable on each industry sector.

These apply at each rating or notch level. Only fill in where necessary.

These apply at each Ticker level. Only fill in where necessary. You can choose how the issuers are rated - by the highest rating of their issues or the weighted-average. Default setting is 'Highest'.

These settings are only applicable if the user has included the relevant columns in the inputsheet. Default values are the current portfolio's values.

This section allows constraint setting on arbitrary columns. The LHS controls allow constraint definition, which can be added to the RHS multi-line inputbox via the ">>" button.

• If a numeric column is selected, the weighted average or proportional sum of that column's values can be used as a constraint. Most often the 'Weighted Average' method is chosen; but for cashflow constraints the 'Proportional Sum' method should be chosen.
• If a non-numeric column is selected, a list of all possible entries in that column is displayed in a listbox in the middle, and the user can select one or several of those entries to define a constraint on their sum of weights.