views from the dark side bill martin - global head of investment risk garp/isda risk forum 19...

Views from the Dark Side Bill Martin - Global Head of Investment RiskGARP/ISDA Risk Forum19 December 2001

2INVESCO Asset Management Limited - Regulated by IMRO

Views from the Dark Side

The Dark Side refers to the “Buy” side

– Investment Management

– Asset Management

– Fund Management

Why “the Dark Side”?

– ”Accept the power of the Dark Side”• Darth Vader to Luke Skywalker – Star Wars

IV



Traditionally, the leaders of “risk management” have come from the “Sell” Side of

investment banks– Mark-to-Market

followed by commercial banks,– Traditional credit expertise

followed by consultants,

advisors,

academics,

rocket scientists,

IT propeller heads,

We created an Industry!



What would one expect from a “Sell Side” risk manager:

– Specialist expertise by risk discipline:• Market Risk

• Credit Risk

• Operational Risk

• (maybe) Portfolio Management

• Regulatory Issues/Basle II



What would one expect from a “Sell Side” risk manager:

– Specialist expertise by asset class:• Fixed Income

• Equities

• Credit Risk (structuring, pricing, documentation, recoveries)

• Credit Trading

• Derivatives/Exotic Derivatives

• Currencies/Commodities

• Emerging Markets



In moving to the Sell Side:

Is this appropriate? Is it sustainable?

Are the skills transferable? Are they sufficient?

Is the knowledge transferable?

What’s the big deal?



The big deal?

O

P

M



The big deal?:

Other

People’s

Money



What do they want?:

– Performance

• Absolute

• Relative



Investment Management - the challenge:

– To deliver superior investment performance in a manner that is consistent with the mandate and/or expectations of our clients.



Investment Risk - the challenge:

– To design and implement an approach to investment risk management that adds value to the global investment management process



Global Investment Management Process:

Macro research & asset

allocation

Micro research & stock/security

selection

Portfolio Construction

Risk Management

Performance Monitoring



Investment Risk – how would you define it:

– As an investor:

• Investment Risk: the failure to deliver investment performance that is consistent with the mandate and/or expectations of our clients.

• Unpleasant surprises



Investment Risk – how would you define it:

– As a risk manager:

• Investment Risk: the measurement and assessment of exposure held by Invesco Global and its clients’ portfolios to expected and unexpected volatility in financial performance and the requirement to ensure that exposure to unexpected volatility is managed effectively and comprehensively at product level.



Investment Risk – What are the Strategic Objectives?:

– Play an active, integral role in the firm’s global investment management process.



Global Investment Management Process:

Macro research & asset

allocation

Micro research & stock/security

selection


Risk Management

Performance Monitoring

Buy List – Credit Risk Assessment

Volatility Analysis

“What if…”




– Embed a strong, consistent risk culture within the firm’s global investment management process.

• Risk Culture relates to the behavior

– the proactive management of risk vs. reward.

• As we work to deliver superior investment performance, actions must be consistent with any client’s mandate and/or their needs.




– Define clearly and precisely the design and structure, roles and responsibilities, priorities and deliverables of Global Investment Risk.




– Play an active role in the growth of the firm through participating in:

• investment performance communications,

• client presentations,

• new product development.



Investment Risk – What is the end game?

– To minimize the firm’s exposure to:

Unexpected volatility of investment performance relative to

mandate

Persistence in investment underperformance

Loss of client assets/Loss of growth in client assets

Loss of revenue/Loss of growth in revenues

Loss of capital



Do we design by risk type?:

– Specialist expertise by risk discipline:• Market Risk

• Credit Risk

• Operational Risk

• (maybe) Portfolio Management

• Regulatory Issues/Basle II



Do we design by specialisation?:

– Specialist expertise by asset class:• Fixed Income

• Equities

• Credit Risk (structuring, pricing, documentation, recoveries)

• Credit Trading

• Derivatives/Exotic Derivatives

• Currencies/Commodities

• Emerging Markets




The design:

Investment Risk Policy (Minimum Standards)

Contribution Attribution and Performance Assessment

Product & Style Integrity Assessment

Risk-adjusted Portfolio Analysis (Volatility Analysis; “What if” analysis)

Core Competencies

Drive the Investment Risk Management process to the performance generating level of the organization across all products, including funds managed directly as well as those managed on an advisory basis.

ExceptionReporting

Local RMC

GRMCGlobal Risk-Adjusted Performance Analysis (GRaPA)

Investment Risk Managers

GMAC



Contribution, Attribution and Performance Analysis

– Contribution – • What factors contributed positively to absolute performance?

• What factors contributed negatively to absolute performance?

– Attribution – • What factors had a positive influence on relative

performance?

• What factors had a negative influence on relative performance?

– Performance –

• Ranking of Performance:

– Quartile

– Time



Product & Style Integrity Analysis

– Marketing Proposition is “Multi-Product/Multi-Style”

• What is defined in the Mandate or Product Specification?

• Are we operating within the mandate?

• No “wiggle room”!



Risk-adjusted Portfolio Analysis– Practical Application of Risk Specialisation

• Market Risk

– Value @ Risk / Assets @ Risk / Performance @ Risk

– Stress & Scenario Testing

– Simulation

» “What would be the impact on performance?”

• Credit Risk

– Expected Loss

» Loss Given Default

– Unexpected Loss



Risk-adjusted Portfolio Analysis (continued)

– Practical Application of Risk Specialisation

• Volatility Analysis

– Expected Volatility

– Unexpected Volatility


Probability distribution of P&L'sP

rob

abil

ity

Monthly Performance (%)

+- 0

5% chance of unexpected loss

-1.5%

5% chance of unexpected gain

+3.0%

INVESCO Asset Management Limited - Regulated by IMRO

Risk-Return

-5%

5%15

%25

%35

%45

%

0% 20% 40% 60% 80% 100% 120% 140%

Risk (% Equity)

Mea

n R

etur

n (%

Equ

ity)


Risk Appetite and Unexpected Volatility

-50%-45%-40%-35%-30%-25%-20%-15%-10%-5%0%5%

10%15%20%25%30%35%40%45%50%55%60%

Risk (% Equity)

Mea

n R

etur

n (%

Equ

ity)


Risk Adjusted Performance Measurement

ELEL 99 %99 %

BaseBase

Pro

bab

ilit

y D

ensi

tyP

rob

abil

ity

Den

sity

Loss Loss £m £m

Base CaseBase Case


EELL

99 %99 %

BaseBase

New New ProfileProfile

Pro

bab

ilit

y D

ensi

tyP

rob

abil

ity

Den

sity

Loss Loss £m £m

Risk Adjusted Performance Measurement

Adjusted ProfileAdjusted Profile



Investment Risk - the challenge:

– To design and implement an approach to investment risk management that adds value to the global investment management process



Investment Management - the challenge:

– To deliver superior investment performance in a manner that is consistent with the mandate and/or expectations of our clients.



At Invesco:

“All we do is invest”

Views from the Dark Side Bill Martin - Global Head of Investment RiskGARP Risk Forum19 December 2001

views from the dark side bill martin - global head of investment risk garp/isda risk forum 19...

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