Investment Risk Governance in Uncertain Markets
Explore the complexities of investment risk governance in navigating uncertain markets. Learn about risk tolerance, strategic asset allocation, policy risk, and execution risk, essential components in effective governance. Understand the challenges faced by investment committees and how to manage overlapping responsibilities.
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Presentation Transcript
New Cover Slide Navigating an Uncertain Environment Sifiso Sibiya
CONTENTS Investment Risk Governance Governance Challenges Possible Solutions
Investment Risk Governance Investment Risk Governance: The determination of risk tolerance, the elements of optimal risk exposure and the oversight framework(1) Ultimate responsibility of governance lies with the Board Investment risk governance is delegated to the Investment Committee Determining investment policy, strategy and procedures The appointment of service providers including managers Monitoring investment performance and policy compliance (1) CFA Institute
Investment Risk Governance Risk Budgeting: The process of allocating resources to components of the investment process by considering their characteristics and their contribution to total risk tolerance and/or appetite (2) Investment risk governance composed of two key components, as determined by the risk budgeting process Policy Risk: Determining investment objectives, investment policy and Strategic Asset Allocation Execution Risk: Security selection, rebalancing, portfolio performance and risk monitoring (2) CFA Institute
Investment Risk Governance Investment risk can also be decomposed of two key components, in line with the risk budgeting process(3) Total Investment Risk = Surplus Risk + Active Risk Surplus Risk: The mismatch between the Strategic Asset Allocation and liability profile. Measure of Policy Risk. Active Risk: The deviation of the actual portfolio from the Strategic Asset Allocation. Measure of Execution Risk. (3) CAIA Association
Governance Challenges Investment Committees meet at regular intervals, but significant events can and do occur in the interim Listed Markets: Significant risk events are largely unpredictable Unlisted Markets: Complexity and time-sensitivity of transactions Overlapping responsibilities between Policy and Execution Risk management Manager is better placed to execute Limed recourse in the event of loss
Possible Solutions Combinations can be selected Selection dependent on risk appetite Delegation to managers Discretion given within IPS Manager acts with fiduciary responsibility Pre-approved strategy: Self-executed actions E.g. repatriating offshore exposures in depreciations Hedging structures: Explicit: LDI Portfolios, Derivatives Implicit: Equity, Private Markets More flexible approval processes: More frequent meetings Concurrent meetings
