Enterprise risk management: an integrated approach for institutional investors

June 21, 2016

Risk Management

At its annual Client Conference, Frontier Advisors held a panel discussion on Enterprise Risk Management.  This followed research completed by Frontier where it put forward the concept of an Enterprise Risk Management Platform, which allows investors to manage the full spectrum of business risks under a consistent, scalable and effective framework.  Discussing the topic was Nicholas Vamvakas (Acting CEO/Executive Officer, Risk at Equip), Matthew Dive (Manager, Portfolio Risk at AustralianSuper), Lee Eriera (IT Manager at Frontier) and Michael Sofer (Consultant at Frontier).

The objective, as Frontier stated at the outset, was to communicate how investors can institute risk frameworks into their business to not only monitor and manage risk, but to be a vital and powerful component of business strategy that itself creates value.  Sofer highlighted that this was a critical issue for all investors, and that his QSG team had been working very closely with clients on the matter.

Vamvakas commenced by saying that Equip had decided to adopt an enterprise perspective on risk rather than viewing it simply in terms of compliance.  He highlighted the importance of holistically managing disparate business risks (such as operational and investment risk) under one consistent framework.  This, he argued, is a powerful and effective solution as management and the Board are able to dictate strategy and direction with a clear understanding of the impact across the entire organisation.  He emphasised that Equip has been on this journey for two years, had undertaken an extensive research program to reach this point, and still had further to go.  Furthermore, Vamvakas stressed the collaboration, education and cultural shift that had occurred across the organisation during the program.

Dive echoed Vamvakas’s thoughts on the need to consider the entire framework and decision making process when it comes to risk.  He spoke about the challenges and opportunities that come with being one of the largest funds in the country, investing in a variety of asset classes, and having a mix of insourced and outsourced investments.  He reflected that the quantum of investment risks that warrant monitoring is expansive, and so an effective method for communicating data to executives and trustees was an exceptions basis.  It was also critical, he said, to work closely with your Board on what the different metrics mean, what is important to them and how the analysis can evolve over time.  Risk workshops had been effective for AustralianSuper.

When questioned on the challenges of reporting risk information to the Board level, Vamvakas described how a set of key risks are monitored and reviewed within pre-defined limits and targets. This provided, clear, actionable reports which promoted decision making rather than passively monitoring data.

Frontier raised the issue of multi-asset class funds utilising third party investment risks systems founded out of one or two asset classes.  Both Equip and AustralianSuper remarked that this had been a big problem.  Analysing one’s entire portfolio – encompassing everything from equities to property to credit to derivatives – was challenging, and either involved a prohibitive amount of time and resources or numerous simplifying assumptions.  Both had spent considerable time with their respective risk system vendors on setup, use and outcomes.  Dive remarked how critical it was to have a risk management strategy in place before commencing discussions with system vendors.  Both Vamvakas and Dive commented that no system, in their experience, had proven to be perfectly suited to an Australian asset owner’s requirements.  Eriera noted that Frontier’s research concurred, although they were working with all the major vendors to help them to better understand the unique market.

Eriera stressed that it was necessary for funds to actively engage with vendors to drive fit for purpose outcomes and workable processes.  He said that implementing a risk framework, on the investment side at least, is about so much more than the risk system itself.  It is about the entire framework, all the way from data to decision.  As an example, he raised the issue of data management.  As funds demand greater accuracy from their systems, this requires significantly more data.  The propensity of funds to spend on IT architecture could inform the type of risk system solution they seek.  Dive agreed that this was critical and said AustralianSuper had already started down this path with a separate data governance project – a significant undertaking in itself.

Frontier closed by reinforcing the importance of adopting an enterprise perspective when it comes to risk management.  Investors have reached a size and level of sophistication where they can no longer afford to treat investments, operations, insurance and administration as separate and independent concepts.  Rather, as Frontier puts forward in its Enterprise Risk Management Platform research papers, a consistent framework helps to encapsulate the key issues and frame business strategy.  Finally, they commented that all investors were able to develop their own custom fit-for-purpose framework.  They simply need to keep their unique characteristics and objectives front and centre.

Frontier continues to advance their research on Enterprise Risk Management Platforms and is happy to share their findings with investors.

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