Investment risk

January 26, 2017

Frontier is conducting extensive research into risk management, particularly investment risk, and plan to have implementable solutions for clients ready in 2017. The key challenges for our clients are system implementation, data management and integrating risk fully into the investment process.

Frontier’s Quantitative Solutions Group undertook an extensive global research trip in October 2015. We met with risk system vendors, boutique risk analytics providers, investment managers and pension funds. The objective was to acquire a better understanding of how various organisations are approaching risk management, and the solutions offered by vendors. Ultimately, we wanted to understand the unique challenges facing our clients in selecting and implementing risk management solutions.

This initial research showed that a holistic approach to risk is required across all areas of the client organisation, and from this concept we set out our Enterprise Risk Management Platform to help define the issues and challenges in a structured and approachable way.

In our first Frontier Line in a series on risk, we outlined the key issues to consider when selecting or implementing a risk system, and how to put those issues together into a cohesive framework – the ERMP.

In the second Frontier Line of the series, we delved deeper into risk system implementation, examining some of the practical aspects of structuring the project and selecting a system based on a defined set of reporting requirements. We also looked in more detail at how risk models vary in philosophy and granularity, and the impact these might have on results. Finally, we looked at the critical role data management plays in the success or failure of a risk management solution.

In June 2016, we facilitated a highly informative discussion at our annual client conference, where Equip and AustralianSuper representatives discussed how they are approaching risk management within their organisations.

Over the course of 2016, the focus of our research turned to specific system solutions and implementation. Our aim is to provide practical advice to clients on the relative strengths and weaknesses of key system vendors, in the light of our detailed understanding of clients’ investment objectives and organisations. To this end, we are conducting an extensive evaluation of Bloomberg’s PORT system, as well as continuing to stay updated with all the major vendors. We are working with clients to implement a realistic trial portfolio in PORT – results of the evaluation will be published soon.

One development we find particularly exciting is the work done by our Capital Markets team on customised stress testing scenarios.  We believe it offers valuable insights for clients by providing transparent models and access to the trusted experts at Frontier. Perhaps the combination of a third-party investment risk system, augmented with customised, interactive analysis from Frontier, could provide the comprehensive solution investors require – watch this space!

Finally, we continue to look at data management challenges, particularly in regard to feeding an investment risk system. Our update article on data management provides further details.