Risk management often carries the reputation of being “command and control.” Is it possible for institutional-class risk management to exist in a culture of freedom and responsibility?
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We say yes!
Earlier in his career, Chris Ryon, our fixed income co-portfolio manager, led a committee of investors and senior leaders who were charged with mapping out the future risk management path for the firm.
The right path was so clear to Chris — you need to empower your team. Portfolio managers need to define and design their risk management approach; they need to take ownership of risk management for their strategy and provide transparent reporting against their commitments.
Without PM buy-in for implementing a risk management approach, you’ll never get true engagement. Even worse, you could incentivize PMs to act primarily to appease internal political structures rather than to provide the best long-term, risk-adjusted returns for clients.
Our entire team of fixed income and equity PMs favor institutional risk management tools that support visibility into our portfolios' risks. We value tools that can be customized to fit our approach. That’s not to say we don’t want to see or understand risks we may not initially be aware of, but rather that we need risk management that speaks our language.
I remember once being told by a huge multi-factor risk model that my domestic portfolio, which had no Japanese exposure, had risk sensitivity to mid-cap Japanese banks. Huh? After a lot of digging, we still couldn’t figure out why.
This was not helpful.
Rather than respond to a huge and unpredictable risk model's standardized output, why not custom design institutional quality risk reporting that aligns with our philosophy and approach? The fixed income team has done this with Perform1, and the equity team has done the same with the Kiski Group2.
We look at many of the same exposures that a big model would spit out, but through a lens that makes sense to us. Not only does this foster PM engagement in the risk management process, but it also leads to differentiated return streams.
Remember — to generate differentiated returns, you need to be different.
IMPORTANT DISCLOSURES
1Perform is a fixed income portfolio analysis system developed by Investortools and used by over 150 fund, institutional and private wealth managers. The system is used for a variety of functions including portfolio and risk management, analytics and reporting.
2Kiski Group ("KG"), is a risk and performance analytics software providing both risk and performance calculations on a daily basis. KG provides third-party, independent risk management consulting services including internal risk reporting and other internal investment process analyses and advice.
The views and opinions expressed by individuals are their own and not the views or opinions of their employer. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. No discussion or information contained herein serves as the provision of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal, tax, or accounting advice.