From a commercial perspective, risk management and monitoring provides important information in understanding the risk profile of the fund’s products relative to those of its competitors. This is beneficial in retention of members when investment performance is a key factor behind the success of a super fund ‘brand’.
As well, a more active risk management process will allow valid comparisons with competitor funds, enabling further differentiation and greater awareness of how the fund is positioned in the market. I believe that incorporating active risk management into all aspects of the investment strategy will improve the management and understanding of the investment options available. To do this DC pension funds must be able to answer a number of questions:
• What is the overall risk of the superannuation funds’ exposure?
• What is the risk of the individual option?
• How is the risk profile of the individual option determined? Is it based on a mean-variance analysis of historical asset class returns, or a factor analysis. Does it incorporate the risk profile of the underlying managers?
• Is the investment strategy of the investment option actively managed within the stated risk profile?
• Is the risk profile of the individual option dependant on the level of funds under management?
The fund’s brand depends ultimately on the investment performance achieved by its investment options. This places an ever increasing emphasis on risk management becoming embedded in the investment management process. As a corollary to this there may be direct financial consequences of poor investment outcomes for the funds.
Paul Kessell, CFA ([email protected]) most recently managed the investment portfolio for the £4.5 billion J Sainsbury plc corporate pension scheme in the UK. He recently returned to his hometown of Melbourne.