TCorp and EISS keep risk analysis close to home
Institutional investors might outsource investment decisions but they must keep accountability for assessing investment risk in house, two experts in the field explained.
Evaluating risk over a multi-manager investment environment is challenging and involves specialist skills, says NSW Treasury Corp (TCorp) senior manager, investment performance and risk analytics, Ian Hagtharp.
TCorp is the amalgamation of various state government-owned funds into what is now a $70 billion investment management business. In recent years, it has been focused on improving the systems it relies on to identify and measure risk, a process Hagtharp expects will take a “couple of years to sort out”.
“Many organisations deal first with the investment process,” Hagtharp said. “There have been a number of large institutions focusing on governance to improve risk management but the effort on systems data and tools – that’s much more challenging than you realise.”
“Risk is not about getting things working well when markets are good, it’s about trying to plan for the small number of rare and difficult circumstances in which you need to test your strategy,” Hagtharp explained.
Choosing to outsource that assessment to an external consultant comes with its own problems.
“From an investment risk perspective, there’s a balance between wanting to identify specialist skills that may be better handled by an external consultant and insourcing enough of these functions that you do have the skills inhouse to make good decisions about which consultants to use and what projects to sponsor,” Hagtharp said. “Managing external specialists is a skill that matters. If you fully outsource everything, you don’t always avoid the problems.”
Hagtharp made his comments at the Investment Magazine Fiduciary Investors Symposium in Healesville, Victoria, November 13-15, 2017, where he participated in a panel titled, ‘The investment risk function in a multi-manager environment’.
Energy Industries Superannuation Scheme (EISS) chief risk officer Stephanie Lyons has veto rights, along with the chief investment officer, on any investment manager appointments.
“No one will get appointed unless I and the chief investment officer agree,” Lyons said. “I am the CRO, so my role is an enterprise risk management focus on all risk across the organisation,” she said, adding that the role was new for super funds but becoming more common.
Lyons’ role arose from the need to address the requirements of the Australian Prudential Regulation Authority’s prudential standard CPS 220. She explained that she folds management of investment risk into the funds’ operational, cyber-security and compliance risk.
“We have an outsource model,” she explained. “One of the key things I undertake is due diligence from an investment strategy [standpoint] and I come in and cover all other facets of operational controls, business continuity, cyber-security and investment risk management processes, because they manage the money.”
She communicates the board’s risk appetite throughout the organisation and monitors it regularly, she said.
“Investment risk, in particular, is looking at meeting return objectives…to have a simple dashboard in place to present to the investment and risk committees to see where we’re at in terms of risk profile,” Lyons said.
EISS made a good decision to insource its investment operations a couple of years ago when it changed its custodian but still outsourced investment management, she said. “Being more of an outsourced model brings its own risks. From an APRA perspective, you have to bring your investment management as material.”