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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.’

” The
consultant is now steadily performing manager reviews and building a database,
which it will update upon subsequent visits to each manager. The minimum
frequency of visits is every two years, David says, but Sentinel will be in
touch more often if problems have been identified through the flags set up for
these reviews such as a major operational change or outsourcing arrangement –
which some managers have done since the last Sentinel review. “Our feedback
from most managers is that they find the process really helpful and comments
constructive,” Scapino says.

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