Investment Firms' Risk Management Hasn't Really Moved On Since 2008 - Allianz GI
Risk management in the oversight of client portfolios has barely budged since the 2008 global financial crisis. That is a problem today, as investors contemplate a series of shocks.
In this year when lots of “unexpected” events are happening – such as Brexit, the rise of Donald Trump and sporting upsets – risk managers in wealth and asset management need to go back to the drawing board, a survey suggests.
Although it does not explicitly name the extraordinary events that have hit the headlines in 2016, a survey of institutional investors by Allianz Global Investors argues that risk management strategies must be overhauled urgently.
Conducted in the first quarter of 2016, AllianzGI’s 2016 RiskMonitor asked 755 institutional investors about their attitudes to risk, portfolio construction and asset allocation. The firms surveyed represent over $26 trillion of assets under management in 23 countries across North America, Europe and Asia.
"Investors are facing a world where average market returns continue to be lower and volatility is higher. In this environment, fulfilling investment objectives will require taking risk and applying truly active portfolio management, which needs to go hand in hand with an adequate strategy for managing that risk. Unfortunately, our RiskMonitor results show that a considerable number of investors do not show much confidence in their ability to manage risks effectively in both up- and down markets,” said Neil Dwane, global strategist, AllianzGI.
In the aftermath of the 2008 crisis, central banks carried out stress tests and wealth managers examined whether reliance on value at risk (VAR) models were fit for purpose; it is also an increasingly common refrain that risk and volatility are not synonymous. Even so, the Allianz findings suggest some parts of the investment world have not adjusted enough.
The report found that since the financial crisis, risk management practices have changed very little. Pre-crisis, investors’ top three strategies were diversification by asset class (57 per cent), geographic diversification (53 per cent) or duration management (44 per cent).
Despite the fact that 62 per cent of respondents admit these strategies did not provide adequate downside protection, their use has actually increased post-crisis, with 58 per cent of investors reliant on diversification by asset class, 56 per cent using geographic diversification and 54 per cent embracing duration management. As a result, two-thirds of institutions are calling for innovative new strategies to help balance risk-return trade-offs, provide greater downside protection and replace traditional approaches to risk management, the report said.
Some 48 per cent of respondents said their organisation is willing to pay more if it means access to better risk management strategies and 54 per cent say their organisation has set aside additional resources to improve risk management.
Allianz Global Investors oversees $495 billion of assets for individuals and institutions worldwide.