Over the last decade I have been a major proponent of institutional investment funds (pensions, endowments, insurance etc.) analyzing their strategies and their risks in a more comprehensive and systematic fashion through enterprise risk management or ERM. Having read countless books and articles on the topic of risk management, it’s encouraging to see greater dialogue on the topic in the industry, but it’s also a bit exasperating to see so little action by investment funds (apart from the mega funds)!
True, it must be recognized that ERM is a newly evolving field, still in its infancy, and that the demands on investment committee time are increasing. That said, it seems quite obvious that conventional approaches to investment management haven’t worked well and seem to be failing us in the new normal—this new market environment of greater austerity, lower returns and higher volatility. Exhibit 1, put forth by Funston and Wagner, demonstrates some of the problems conventional wisdom faces in an unconventional reality. In fact, as shown by the latest $2.3 billion “rogue trader” loss at UBS, we don’t even seem to learn from recent past errors (Soc Gen—Kerviel, Barings—Leeson, etc.), where conventional wisdom should ensure compliance. The crux of the problem is the inequitable amount of time and resources that investors spend on return over risk. To remedy this requires an overhaul of the approach to risk management, and building an organization-wide risk management framework and culture, or ERM.
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