(May 17, 2013) — Unsophisticated risk monitoring systems using out of date information are hurting pension fund investments, rather than protecting them, a survey has claimed.
Almost two-thirds of respondents to a survey by investment consulting firm bfinance said their risk monitoring system was not sufficiently sophisticated to estimate risk at a portfolio level.
This sat at odds with more than two thirds of them agreeing that risk management was very important when selecting a fund manager, and almost half considering the factor as essential when designing and implementing portfolio strategy.
“Only 35% of institutional investors say they are using a sophisticated system to monitor risks. Most investors are therefore over-dependent on models based on historic returns, an approach which can significantly underestimate risks at portfolio level,” bfinance said.
Institutional investors were asked to name the greatest risks they foresaw over the next 12 months. They quoted asset price collapse, volatility, and contagion or correlation event as their top three. However, bfinance said that other than long-term rates going up, few asset owners had defined action plans to mitigate the impact of these potential risks.
There has been some improvement in the field, however.
The survey showed 47% of respondents had “substantially increased” their risk management controls over the past two years, with a further 29% citing “somewhat increased” systems. The rest had retained the same level of oversight and risk management.
This improvement may have been a knock-on effect from the diversification that has been taking place within investor portfolios.
Hedge funds, private equity, and real estate all require more sophisticated risk monitoring systems, bfinance said.
“According to investors, monitoring complex investments such as private equity or hedge funds is judged to be almost twice as difficult as monitoring traditional equities and bonds,” the report said.
It also cited investors as being ready to increase their holdings in these – and other “alternative” asset classes, which could further stretch existing systems.
Respondents to the survey were global institutional investors responsible for a combined $482 billion.