Importance of risk management grows

In addition, over the next five years, 73% expect to spend more time on investment risk issues, while 68% expect to spend more time on operational risk issues. Only 25% of respondents, however, had a chief risk officer.

“Institutional investors are up against some formidable risk pressures, from new regulations to transparency concerns, to investment risks across the board,” says Debra Baker, head of BNY Mellon’s global risk solutions group.

Key findings of the study include the following:

• No more chasing alpha:It is down with alpha and up with targeted returns. Institutional investors are placing greater emphasis on achieving absolute return targets as opposed to outperforming a market benchmark. Risk budgets, matching liabilities and avoiding downside risk all play an important role in this shift.
• Increased use of alternatives: Survey respondents have expanded their use of alternative investments to improve diversification and potentially help with downside risk. Institutional investors plan to increase their allocations to alternatives over the next five years.
• A reawakening of risk awareness: The 2008 financial crises caught many institutional investors off guard. The risk management procedures then in place were widely perceived to be insufficient for a crisis of such magnitude. The drive for more effective, holistic risk management was soon on.
• Analytical tools on the front lines of risk management: Analytical tools based upon risk-return analysis and performance attribution continue to be the most commonly used to model, analyze and monitor investments. Total plan/enterprise risk reporting tools are on the rise to encompass traditional and alternative investments, as well as liabilities.
• Avoidance of unintended bets: A desire to avoid unintended leverage and to better understand underlying investments has grown markedly since the 2008 financial crisis and appears to be driving institutional investors toward solutions offering greater investment transparency.

Respondents to the 2013 survey indicated that the market events surrounding the 2008 financial crises and subsequent recession represent their biggest motivator when it comes to focusing on risk. More than 60% said increased management awareness of the growing field of risk management caused their firm to institute risk management practices.

Over the last five years, 59% of respondents felt their firms had benefited through the evolution of risk management, though many remained undecided about the impact, with results varying markedly by region.

More than 100 institutional investors—including pension funds, endowments and foundations with approximately US$1 trillion ($1.1 trillion) in aggregate assets under management—participated in the survey.

Related articles:

• Canadian DB plan sponsors lag behind on risk management
• Financial firms struggle with risk management