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As if any more proof were needed that “risk” has replaced “return” at the forefront of investor minds, Mercer Sentinel has globally expanded its funds manager operational risk reviews that started in Australia two years ago. Visiting Australia New York will be quite different to London, for example,” Scapino says. “Additionally, you will find different standards by asset class or investment type. For example, operations and controls supporting OTC derivatives are still very manual. We question managers’ internal controls and challenge them saying ‘we understand your operations are somewhat defined by your counterparties and market standards, but what are you doing to bring yourself up towards a safe and sound standard?’”

Amongst other clients, Mercer Sentinel has two multimanager clients in Australia for whom it has performed operational risk assessment reviews for all their managers, both pre- and post-hire, for two years, and many more clients which have used this service on at least a one-off basis. Some clients have not been Mercer Investment Consulting clients, according to regional Mercer Sentinel director Lounarda David, indicating that investors are beginning to seek out specialist expertise and experience on operational risk.

The reviews start with getting desktype information first, analysing this information and then spending a couple of days at a manager’s premises, talking to everyone from the executives to the dealers to the junior administration and control staff, Scapino says. As an example of what the reviews can uncover, Scapino recalls Sentinel visiting a funds manager that had 30 to 50 staff, and on paper had people with titles that indicated a proper segregation of duties. “But this was a manager which only traded once in a blue moon, maybe 30 times a year, and when we started talking to the dealers, they openly said that they performed the backoffice functions as well, because management didn’t think they had enough trades to execute and needed another job to do…our advice to them was, ‘give them another job by all means, but don’t make it moving the cash.’

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