Demand is increasing amongst institutional investors and investment managers for information and analytics to support risk management, and a need to improve their organizations’ ability to successfully implement risk models in the investment process, a recent survey reveals.
Northern Trust’s survey of top investment and operations executives from 50 global organizations finds that nine in 10 respondents rate risk as an “important” or “primary” consideration in their decision making, while roughly the same percentage feel they need additional skills and experience to effectively model, interpret and utilize the results from sophisticated risk models.
According to the poll, the sources of portfolio risk are changing. While market volatility remains the greatest source of risk, liquidity risk is also a leading concern in the wake of last year’s credit market crisis. Seventeen per cent of respondents felt liquidity was the greatest source of risk for investment programs in 2009, compared to just 2% who felt that way in early 2008. Nearly 45% of respondents said valuation and risk models could have performed better in predicting the impact of liquidity risk over the last 12 months.
Other findings from the survey include:
• 93% of organizations generally believe risk models provide useful information but more than half (55%) do not have a risk measurement system today.
• 87% of organizations feel their organizations need additional skills and experience to effectively model, interpret and utilize the results from sophisticated risk models.
• When it comes to purchasing a risk measurement system, nearly four in 10 said the level of experience on staff to manage the system would be an inhibitor.
• More than half (51%) feel their organizations need to improve their efforts regarding due diligence on the valuation process for their portfolios.
“Institutional investors and investment managers are telling us they want valuation model transparency and they appreciate practical experience in using risk models,” says Paul d’Ouville, head of Northern Trust’s C&IS global product management group. “There is a new reality in the security pricing arena, where complexity has increased and transparency is expected. With their resource challenges, organizations are increasingly seeking expertise from outside firms that can demonstrate practical solutions and help them benefit from the information provided by quantitative risk models.”
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