Pt\C? (   Pretlit.e: r<. i.ipiv ■ ■<■ [ i ljl:-iin^ fcrrui: " '.'. "1 F- -ii ■ 11 ................ ■■ 11 ,.i-j- ::-.J .............. [■■ il . i ■ .i       ■ eh 'r--. ! 1.   Risk Monitor Summary ■*-;. >i-.t|is:-:ii Contribution lo m Tracking r-rcr-------- " Ulfi. . ji.l.j .■':. I ■ i i ■ u:l Iv ■ ■ ii!u: =!:. ■_,■ ■_________ overweight in STT. FIGURE 17.1 Risk Report for a U.S. Equity Fund pense budget but is materially over budget in legal fees (with favorable offsets in other areas), the reviewer might conclude that an event is present that might put future returns at risk. The same principle holds for risk monitoring. Managers should be able not only to articulate overall tracking error expectations, but also to identify how such tracking error is decomposed into its constituent parts. This will let the risk manager opine on whether risk is being incurred in accordance with expectations both in total as well as at the constituent level. If the risk decomposition is not in keeping with expectations, the manager may not be investing in accordance with the stated philosophy. This type of situation is often referred to as "style drift." An example of this might be a growth manager who is investing in consonance with the correct overall tracking error target, but who is placing most of the risk in value themes. In this case, the investor is acquiring the correct level of overall risk, but the wrong style decomposition. Examples of risk decomposition that a manager should be able to articulate and which the RMU should monitor might include: II The range of acceptable active weights (portfolio holdings less benchmark holdings) at the stock, industry, sector, and country levels. 11 The range of acceptable marginal contributions to risk at the stock, industry, sector, and country levels. Refer again to Figure 17.1. For this particular portfolio, we observe that State Street Corp. represents an active weight of 1.95 percent of the total portfolio and that its marginal contribution to tracking error is 5.96 percent. The risk monitoring function should conclude as to whether this active weight and risk