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FEAL funds raise risk analysis concerns
Nicolas Le Clech
Super funds say that the increasing complexity of risk analysis and management is their biggest concern in the current market and regulatory environment. But whether they have the tools at hand to address their concerns is another story, according to the recent round of Fund Executives Association Ltd member lunches.
Nicolas Le Clech, the Paris-based global head of investment reporting and performance for BNP Paribas Securities Services, said at the FEAL gatherings that “risk means different things to different people”. He thinks of it as being different “families of risks” which include operational, business and investment risks.
A survey of major pension funds and other institutions by BNP Paribas earlier this year revealed the complexity of risk analysis and management as their “biggest challenge” (23 per cent of respondents). The pension funds in the survey were particularly concerned, with 33 per cent of these seeing risk analysis and management as the biggest challenge. The next biggest challenge for all institutions (14 per cent) was hiring and retaining talent.
The regulatory response to the global financial crisis has largely been dealt with by super funds and other institutions. But Le Clech raised with FEAL members the issue of addressing the low-yield market environment. Many funds are taking on more risk in order to enhance returns.
“Risk is a lot wider than most people think,” he says. “Our survey showed 60 per cent of institutions are enhancing returns though things such as enhanced cash strategies and securities lending programs. But the use of alternatives has come down.”
There is also economic risk. For instance, there is an economic imbalance in the indices that people use, he says. With the MSCI World [equities] the US makes up about 55 per cent of the market cap and China, the second-biggest economy in the world, is not even in it.”
The indices don’t tell the full story on particular stocks, either. For example, investors may think of Nestle as a safe Swiss-based company but most of its revenue come from Brazil and China, which present a different profile from a broader business perspective.
There is also the trend to in-house investment management as funds get larger, which has been a well-documented trend in Australia. “This brings more and different risks to the table,” Le Clech says.
In terms of operational support for investment activities, the survey showed that about half of funds had in-house systems and the other half had a mix of in-house and outsourced support. This may raise the question of who is checking on transactions.
Le Clech says that pension funds believe, generally, that they have the appropriate framework in place for risk analysis and management but they question whether they have the “equipment” to manage it. Liquidity risk, for instance, poses particular problems for analysis.
“I can tell you that with investment risk, which is where I spend a lot of my time, there is a lot more that can be done [by funds],” he says. “We [securities services firms] can be used as an independent view to measure risks and align them to the objectives of the funds.”
