More than four-fifths (80%) of institutional investors expect risk management to play an even greater role in their investment decision process in the future, according to a new study.

The research, published by BNY Mellon in collaboration with Harry Markowitz, the Nobel Prize-winning economist, also found that, over the next five years, 73% of investors expect to spend more time on investment risk issues, while 68% expect to spend more time on operational risk issues.

Yet only 25% of respondents have a chief risk officer.

The report – New Frontiers of Risk: Revisiting the 360º Manager – examines a broad array of risk-related topics, including market risk, performance versus liabilities, credit risk management, alternative investments and best practices.

It questioned more than 100 institutional investors around the world, including pension funds, endowments and foundations, with around $1trn (€730bn) in total assets under management.

Its other key findings include:

  • Chasing alpha is out of favour. Investors are placing greater emphasis on achieving absolute return targets, instead of outperforming a market benchmark
  • Investors plan to increase their allocations to alternatives over the next five years, to improve diversification and potentially help with downside risk
  • There has been a re-awakening of risk awareness. The risk management procedures in place when the 2008 financial crises happened are widely perceived to have been insufficient, leading to a subsequent drive for more effective, holistic risk management
  • Analytical tools based on risk/return analysis and performance attribution continue to be the most commonly used tools for modelling, analysing and monitoring investments – total plan/enterprise risk reporting tools are becoming popular
  • Investors want to avoid unintended bets – they are being driven towards solutions offering greater investment transparency to avoid unintended leverage and acquire a better understanding of underlying investments

Respondents also said the market events surrounding the 2008 financial crises and subsequent recession represented their biggest motivator when it came to focusing on risk.

More than 60% said increased management awareness of the growing field of risk management had caused their firm to institute risk management practices.

Markowitz said: “The crisis of 2008 was different. So will be the next crisis. The moral is that one will never be able to put the portfolio-selection process on automatic.”

He added: “The trusted quant team needs to constantly evaluate the current situation. It should also make sure higher management understands what assumptions are being made, how and by whom any exotic asset classes being used have been evaluated, and what the vulnerabilities are of the general approach that is being taken.

“Furthermore, the push to integrate risk control at the enterprise level, rather than at the individual portfolio level, should be continued.”

A similar study from BNY Mellon was carried out in 2005, again with input from Markowitz.

In a significant shift from the previous results, respondents to the new survey rated “under-achieving overall return targets” and “underperforming versus liabilities” as their two most important risk policy measures.

Between the two surveys, these two measures increased more than any other response within this category.

According to Debra Baker, head of BNY Mellon’s global risk solutions group, risk management has been a puzzling proposition for many institutional investors.

She said: “Just when they think most risks have been measured, managed and mitigated, new ones emerge and old ones evolve.

“We see the need for a collective risk management framework that incorporates all areas of risks, their impact on each other and one’s overall investment programme.”

She added: “Using some form of quantitative scoring across major risk categories may be the next frontier of risk management.”

The survey may be downloaded here. 

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