1. finance
2. personal finance
3. financial planning
4. asset and portfolio management

RISK ANALYTICS –
CHALLENGES AND PERSPECTIVES
IN A LOW YIELD ENVIRONMENT
A report in collaboration with
A BNP PARIBAS SECURITIES SERVICES PUBLICATION
The bank
for a changing
world
Managing editor
Kate Spencer, Global Marketing Manager, Asset Owner Segment, BNP Paribas Securities Services
Contributors
Michelle Toy, Head of Marketing and Communications, Asia Pacific, BNP Paribas Securities Services
Darren Yaxley, Associate Director, YouGov
Special thanks
Valérie Nicaise, Head of Investment Risk and Performance (IRP) Solutions, BNP Paribas Securities Services
Dietmar Roessler, Head of Client Segment, Asset Owners, BNP Paribas Securities Services
Madhu Gayer, Head of IRP Solutions, BNP Paribas Securities Services Asia
Mark Schoen, Head of Asset Owner Solutions, BNP Paribas Securities Services
Jean Devambez, Head of Asset and Fund Solutions, BNP Paribas Securities Services
David Raccat, Head of Market and Financing Services, Asia Pacific, BNP Paribas Securities Services
Shaun Hammond, Head of Marketing and Communications for the UK, Middle East and South Africa, BNP Paribas Securities Services
Borja Rodriguez, Product Specialist, IRP. Spain, Portugal and Latin America. BNP Paribas Securities Services
Guy McKanna, Media Relations, BNP Paribas Australia
Foreword
Foreword
Foreword
It has been nearly seven years since the financial crisis. Since then new regulations have changed
how asset owners and asset managers understand and address risk, particularly investment risk.
As a securities services provider, our clients face a variety of risks – operational, investment and
counterparty to name but a few. Our role includes offering analytical tools to institutional investors
so that they can measure and monitor risk, demonstrate good governance and ultimately make
better decisions for their clients and investors.
As part of our global thought leadership programme, we commissioned 177 detailed interviews
with asset owners (pension funds, insurance companies, sovereign wealth funds and central
banks) worldwide, asking their views on the different risks they face and how they measure
and mitigate them.
We are pleased to bring you the results of that survey: an inside view on the risk pressures felt
by asset owners, with approximately USD 6 trillion aggregated assets under management.
The survey findings are of interest not only to asset owners but also to service providers, to asset
managers and to banks and broker dealers.
I hope you find this paper an interesting and thought-provoking read.
Dietmar Roessler
Head of Client Segment
Asset Owners
BNP Paribas Securities Services
Table of
contents
Table of contents
08
Executive summary
10
Section 1 – Research methodology and risk
management defined
14
Section 2 – Risk perspectives and the low
yield environment
25
Section 3 – Techniques in managing risks effectively
28
Section 4 – Insourcing, outsourcing and
managing counterparties
35
Section 5 – Uncovering risk analytics
39
Section 6 – Asset allocation strategy –
review, reporting and monitoring investment risks
44
Section 7 – The next phase of risk management
47
About BNP Paribas
50
About YouGov Plc
53
Appendices
Executive summary
Executive summary
Executive summary
Risk management appears to be a mature topic across asset owner segments (insurance companies,
pension funds, official institutions and corporates) as evidenced by the confidence in both their
in‑house expertise – people and processes – and the range of techniques they use to monitor risk.
While asset owners feel confident in their management of a broad array of risks – operational,
liquidity, investment, political etc. – they see increasing complexity particularly in the field of
risk management.
In a low yield environment, asset owners are looking to enhance yield from existing assets. Many are
additionally diversifying through active or alpha strategies and by investing in new markets.
Risk appetite and the capacity to diversify vary by segment. For example:
¡¡ Corporates have the most flexibility among segments to enter new markets
¡¡ Official institutions (central banks, government agencies and sovereign wealth funds)
are least likely to increase their exposure to emerging markets in the current low
yield environment
A number of methods used to monitor investment risk are considered effective by asset owners.
These include stress testing, exposure reporting, liquidity risk analysis and use of models such as VaR
(Value at Risk). Liquidity risk analysis in particular is a major focus for asset owners across segments,
which could reflect the prolonged low interest rate environment and heightened awareness of
liquidity risk post the financial crisis.
Although individual risks appear to be understood and asset owners are satisfied with their risk
reporting and analytics, the solutions they are using today are unlikely to be sufficient in an
increasingly complex environment.
Asset owners still require greater transparency, data aggregation tools and a holistic understanding
of risk across asset classes. The next phase of risk management requires not just an understanding of
regulatory developments and analytical techniques, but also a consolidated and shared view of risk
throughout the organisation.
¡ 9 ¡
Section 1
Research methodology
and risk management
defined
Section 1 – Research methodology and risk management defined
YouGov interviewed 177 asset owners on our behalf. Respondents were based in 19 countries
across the globe. 26 questions, were conducted by telephone, and covered attitudes to risk and the
measures taken to analyse and mitigate risk.
Respondent profile
Interviewees by Type of Institution/Segment
18%
34%
14%
33%
Insurance companies (61)
Official institutions1 (25)
Pension funds (59)
Corporates (32)
34% of interviewees were from insurance companies, 33% were from pension funds, 14% were from
official institutions. The remaining 18% of interviewees were from corporates.
Interviewees by Role Type
Treasury/Finance Director
24%
21%
Risk Manager
C-suite
15%
Portfolio/Investment Manager
12%
Operations Manager
10%
Compliance Manager
8%
Trustee of pension fund
Corporates
7%
2%
0%
10%
20%
30%
40%
Interviewees occupied a range of roles not least in finance, risk management and operations.
1
Central banks, supranational agencies and sovereign wealth funds
¡ 11 ¡
Section 1 – Research methodology and risk management defined
Interviewees by Region
NORTH AMERICA 16%
EMEA 41%
ASIA PACIFIC 32%
SOUTH AMERICA 10%
41% of interviewees (73 asset owners in total) were from EMEA, 32% (57 asset owners) from Asia
Pacific, 16% (29 asset owners) from North America and 10% (18 asset owners) from South America.
Interviewees by Country
10
28
1
8
5
10
4
5
8
8
12
16
10
10
8
9
11
6
8
Australia
Japan
Brazil
Malaysia
Canada
Middle East/UAE
Chile
Nordics
China
Netherlands
Colombia
Singapore
France
Switzerland
Germany
United Kingdom
Hong Kong
United States
Italy
¡ 12 ¡
Section 1 – Research methodology and risk management defined
Interviewees by Assets Under Management (AUM)
USD 1bn-USD 5bn
USD 5bn-USD 10bn
24%
14%
USD 10bn-USD 50bn
18%
More than USD 50bn
0%
45%
20%
40%
60%
80%
100%
A significant proportion of interviewees, approximately 45%, are responsible for managing over
USD 50 billion in assets. Nearly a quarter of interviewees, approximately 24%, are at the smaller
end of the scale, managing USD 1-5 billion asset range.
Where assets are held regionally
Nearly two thirds of global pension assets are held in North America. This is followed by roughly
18% in Europe and 15% in Asia Pacific2. Asia Pacific’s pension reserves are in the accumulation
and growth phase in many countries. Europe and North America in contrast are typically older
pensions markets.
A different picture emerges for sovereign wealth funds with Asia Pacific holding 39% of the world’s
SWF assets. This is followed by the Middle East at 37% and Europe with nearly 17% of SWF
global assets3.
In the insurance market, Asia Pacific has a smaller share (although the rate of accumulation is
outpacing the rest of the world). Europe has the largest pool of insurance assets at 46%. This is
followed by North America at 28% and Asia Pacific at 24% 4.
We have included in the appendices the regional profile of interviewees by type of institution and by
size of the organisation.
Risk management defined
Risk management as a function or discipline has come to the fore in recent years. It has become
better integrated within organisations and is seen as critical to good governance. Better risk
management is also now increasingly being seen as an enabler for growth and innovation.
There are of course many types of risk to which an asset owner is exposed – market risk, credit
risk, liquidity risk, operational risk, liability risk – to name but a few. Investment risk relates to
asset returns, valuations and expectations, and includes interest rates, liquidity and currency risks.
Counterparty risk is essentially the risk that a counterparty will fail to meet its obligations.
2
3
4
“Global Pensions Assets Study 2015”, Towers Watson, February 2015
Sovereign Wealth Institute www.swfinstitute.org/fund-rankings/
OECD Insurance statistics database for 2013
¡ 13 ¡
Section 2
Risk perspectives and the
low yield environment
Section 2 – Risk perspectives and the low yield environment
“The most incomprehensible thing about
the world is that it is comprehensible”
Albert Einstein
What do you see as the major challenges for your organisation
over the next 12 months? And which has been recognised by
your senior management/the Board as the biggest challenge?
59%
Risk management will
become more complex
Increased complexity (internal
and external environment)
Ensuring we have the correct
data for decision-making
23%
43%
10%
43%
10%
41%
Ability to efficiently manage costs
11%
40%
Ability to efficiently use capital
11%
40%
Hiring and retaining talent
14%
33%
Ability to innovate
7%
Ensuring we have the correct data
to meet regulatory requirements
3%
Cost of regulatory compliance
3%
Ability to implement optimal asset
allocation strategies
Ability to set strategic direction
33%
28%
25%
4%
16%
2%
Ability to expand into new markets
1%
1%
Other
1%
1%
0%
20%
40%
60%
80%
Major challenges
The biggest challenge
Based on responses from 177 asset owners
Respondents could choose more than one challenge. More than half of respondents – some 59%
of interviewees – see the increasing complexity of risk management as a major challenge.
Increasing complexity (cited by 43% of interviewees) was the next major concern – this is
complexity in general, be it the internal environment of the organisation or the external
environment of macroeconomics and the value chain.
¡ 15 ¡
Section 2 – Risk perspectives and the low yield environment
Having the correct data for decision-making was also cited as a major challenge by 43% of
respondents. This perhaps points to a greater need for transparency. In support of this trend,
insurance companies implementing Solvency II, are increasingly using the data for regulatory
reporting, to better monitor investment risk including concentration risk (geography, currency
and sector etc.).
In terms of the most significant challenge facing organisations, we were interested to know the
views of the Board and senior management. Here complexity, whether concerning risk management
or more broadly the internal or external environment, comprised a third of responses (33% of
respondents). Hiring and retaining talent is also clearly a key issue for the top of organisations.
A segment perspective: major challenges facing the organisation
100%
80%
60%
68%
68%
66%
59%
56%
56%
51%
48%
48%
40%
48%
47%
44%
42%
44%
48%
46%
44%
41%
38%
37%
36%
32%
40%
38%
36%
33%
31%
28%
32%
29%
27%
25%
25%
22%
24%
22%
19%
19%
20%
25%
19%
16%
16%
16%
13%
3%
0%
Risk
management
will become
more complex
Increased
complexity
Ensuring we
have the
correct data
for
decisionmaking
Ability to
Ability to
efficiently efficiently use
manage costs
capital
Hiring and
retaining
talent
Insurance companies
Official institutions
Pension funds
Corporates
Ability to
innovate
Ensuring we
Cost of
have the
regulatory
correct data compliance
to meet
regulatory
reporting
requirements
Ability to
implement
optimal asset
allocation
strategies
Ability to set
Ability to
strategic
expand into
direction
new markets
Other
Based on responses from 177 asset owners
Aside from issues around complexity, we noticed that insurance companies and official institutions
are concerned about the ability to efficiently manage costs (56% of official institutions), data for
decision-making (56% of insurance companies), and hiring and retaining talent (an issue for 68% of
official institutions).
Despite an explicit focus on risk from regulators, we were surprised to see less focus on the cost
of regulatory compliance. This suggests that for asset owners the major era of implementing new
regulation is behind them. Only 33% of insurance companies, 25% of pension funds and 32% of
official institutions included this as a major challenge. Now that most of the major regulations
introduced after the financial crisis have been implemented by asset owners and as these
regulations are further embedded within organisations, it is quite possible that the focus has
moved away from cost and more to the quality of data and effectiveness of risk management.
¡ 16 ¡
Section 2 – Risk perspectives and the low yield environment
The regional perspective – the biggest challenge faced by the board
In terms of the regional perspective, complexity was the number one issue for all regions bar EMEA,
which is most concerned about hiring and retaining talent. In contrast, North American boards have
fewer concerns around hiring and retaining talent. This perhaps reflects the differences in labour
mobility between these two regions.
40%
33%
31%
30%
22%
20%
19%
22%
19%
17%
17%
17%
16%
14%
11%
12%
14%
12%
11%
12%
11%
10%
7%
7%
7%
6%
7%
7%
5%
5%
4%
5%
4%
4%
4%
4%
4%
3%
3%
2%
1%
0%
Risk
management
will become
more complex
Increased
complexity
Ensuring we
have the
correct data
for
decisionmaking
Ability to
Ability to
efficiently efficiently use
manage costs
capital
Hiring and
retaining
talent
EMEA
South America
North America
Asia Pacific
Ability to
innovate
Ensuring we
Cost of
have the
regulatory
correct data compliance
to meet
regulatory
reporting
requirements
Ability to
implement
optimal asset
allocation
strategies
Ability to set
Ability to
strategic
expand into
direction
new markets
Other
Based on responses from 177 asset owners
¡ 17 ¡
Section 2 – Risk perspectives and the low yield environment
How are you addressing a continuing low yield environment?
“In times of low rates and increasing competition,
it’s difficult to achieve our investment targets”
Trustee of a pension fund, Brazil
Enhancing returns from
our current investments
60%
23%
Use of active/alpha strategies
New/increased exposure to
emerging markets
New/increased exposure to
alternative assets
Other strategy
Don’t know
0%
21%
9%
8%
16%
20%
40%
60%
80%
Based on responses from 177 asset owners
A low yield environment is possibly the biggest macroeconomic challenge asset owners are facing.
With this question we wanted to address the level of diversification an asset owner was willing
to take in order to achieve better returns. This not only includes asset diversification, but also
enhancing returns from current assets.
By far the most common response (60% of respondents) to addressing a low yield environment is by
enhancing returns from current investments such as through use of securities lending or enhanced
cash management. This was in fact the number one response in every region and with every segment.
There are a number of factors that could be driving this:
¡¡ Highly regulated segments – such as pension funds and insurance companies – have fewer
options beyond remaining in high-quality fixed income – owing to regulatory constraints.
Such assets are in demand and therefore easily and safely lent
¡¡ There are fewer investment opportunities offering the appropriate risk-return trade off and
that allow asset owners to remain within mandated risk parameters
¡¡ For the largest institutions, there may be difficulties in trying to change allocations or
maintain the desired level of liquidity, particularly in smaller jurisdictions
Interviewees could pick more than one response. Looking at other methods to address a low yield
environment and particularly in terms of how to invest, South America is the region most likely to
use active or alpha strategies (61% of respondents included this as a method they are using). EMEA
is most likely to look at new or emerging markets (30% of respondents). See appendices for the
regional perspective.
¡ 18 ¡
Section 2 – Risk perspectives and the low yield environment
South America’s pension fund systems have very clear investment strategies
and asset allocation constraints. There are compulsory mechanisms in place
setting asset allocation limits according to the age of the pension fund member.
Each regulator has set investment profiles according to the age of the pension
fund member, with asset allocation becoming more conservative, the closer to
retirement age. Risk profiles would include, for example, risky (under 35 years old),
intermediate (between 35 and 45), moderate (46 to 59) and highly moderate (older
than 60). Each risk profile has clearly defined benchmarks. Pension fund managers
look to demonstrate alpha over and above these benchmarks. In addition, regulators
have set a minimum return for each investment profile which effectively pushes fund
managers to use active alpha strategies in an effort to outperform minimum returns.
In terms of asset owner segments, we noticed the greater capabilities or flexibility for corporates
to increase exposure in emerging markets (38% of corporate respondents) in comparison to other
segments (23% for insurance companies, 17% for pension funds and 8% for official institutions).
To summarise, asset owners feel confident in how they manage an array of risks; we know they
also overwhelmingly see the world as increasing in complexity, and particularly in the field of risk
management. As we explore in later sections of this paper, although individual risks are understood,
not least because the appropriate monitoring tools have been developed, there is still a need for
better tools and analytics.
How will your organisation meet its major challenges?
We asked interviewees how they intended to meet the challenges they had identified. Many of the
responses focused on managing investment risk and indicated a more conservative response to the
risk-return trade off.
“
We’re looking for alternative information sources
in order to validate our own risk forecasts. We’re
also applying far more conservative investment
policies than before
We coordinate and track analysis of
all our assets and liabilities and run
scenario testing
Finance Director, insurance
company, Malaysia
C-Suite executive, government
agency, Malaysia
We’re investing in liquid assets to meet more
immediate benefit payments. We’re also evaluating
all options around fixed income investing and
opportunities that provide a good risk return trade-off
Trustee of a pension fund, Brazil
¡ 19 ¡
Section 2 – Risk perspectives and the low yield environment
Some responses looked at broader investment opportunities and ways to generate alpha.
We’ll continue investing in government
bonds. We think Eurobonds are too risky.
Emerging markets and companies with
good credit scores are more interesting
Our risk management practice
increasingly enables us to make that
transition from investing in domestic
market entities to global markets
Risk Manager, insurance
company, United States
“
Finance Director, pension fund,
Germany
Many respondents focused on the importance and effectiveness of their risk management practices.
“
Well we have a professional team
who manage risk globally. We have
the expertise and tools, including a
corporate risk management system
Operations Manager, insurance
company, United States
The robustness of risk processes
is important. We’ve established
metrics, assigned accountability
and monitor performance
Trustee of a pension fund,
Malaysia
Our organisation has the necessary capacity
and solvency to cope with change and
market fluctuations. We have a plan of
action for 2015 which includes various
measures aimed primarily at controlling risk
Risk Manager, pension fund,
Chile
¡ 20 ¡
Section 2 – Risk perspectives and the low yield environment
To what extent is your organisation effectively managing risk?
Asset owners are confident in how their organisations handle a wide variety of risks be they
counterparty, investment or operational, as shown in the chart below. They are, however, slightly
less comfortable with political risk – perhaps unsurprising given current world developments.
Solvency Capital Requirements risk 2% 5%
86%
Liquidity risk 3% 9%
7%
1%
87%
Investment risk 2% 10%
87%
Operational risk 3% 12%
Regulatory/Compliance risk 5%
13%
Market infrastructure risk 4%
14%
1%
84%
1%
82%
Currency risk 3% 14%
80%
2%
81%
2%
Credit or counterparty risk 5%
13%
80%
2%
Fundamental/systematic market risk 7%
11%
79%
3%
79%
3%
Asset Liability Matching risk 4% 14%
Political risk 7%
0%
15%
20%
73%
40%
60%
Not confident
Confident
Relatively confident
Don’t know
5%
80%
100%
Based on responses from 177 asset owners
Solvency Capital Requirements is specific to insurance companies. The valuation and reporting
of assets and liabilities requires a re-engineering of current processes, data management and
streamlined reporting to ensure capital requirements are adequately calculated. 86% of insurance
companies in this survey feel they effectively manage their solvency capital requirements risk.
This result is reflective of the current implementation stage insurance companies are undergoing.
¡ 21 ¡
Section 2 – Risk perspectives and the low yield environment
The regional perspective: the effective management of risk
At the regional level, liquidity risk scored highest across the Americas in terms of confidence levels.
Operational risk scored highest in Asia Pacific and investment risk in EMEA. Asset and Liability
Matching received its lowest score in South America with only 50% of respondents feeling that this
risk was managed effectively.
EMEA
Solvency Capital Requirements risk 6%
81%
Liquidity risk 3%
15%
Investment risk 1% 14%
Operational risk 5%
14%
Regulatory/Compliance risk 6%
16%
Market infrastructure risk 4%
81%
1%
84%
1%
80%
25%
Credit or counterparty risk 7%
71%
84%
15%
Asset Liability Matching risk 4%
20%
4%
74%
4%
73%
4%
15%
0%
3%
73%
18%
Political risk 8%
1%
75%
14%
10%
1%
78%
Currency risk 3% 12%
Fundamental/systematic market risk
13%
40%
60%
Not confident
Confident
Relatively confident
Don’t know
80%
100%
Based on responses from 73 asset owners
North America
Solvency Capital Requirements risk 5% 5%
90%
Liquidity risk 3%
97%
Investment risk 7%
Operational risk
Regulatory/Compliance risk
Market infrastructure risk
93%
86%
14%
93%
7%
90%
10%
Currency risk
Credit or counterparty risk
83%
17%
90%
10%
Fundamental/systematic market risk 4% 10%
83%
Asset Liability Matching risk 7%
Political risk
90%
3%
79%
17%
0%
20%
40%
60%
Not confident
Confident
Relatively confident
Don’t know
Based on responses from 29 asset owners
¡ 22 ¡
3%
4%
80%
100%
Section 2 – Risk perspectives and the low yield environment
Asia Pacific
Solvency Capital Requirements risk 4%
87%
Liquidity risk
5%
2%
Investment risk
5%
2%
2%
91%
2%
91%
Operational risk 7%
93%
Regulatory/Compliance risk 2% 10%
Market infrastructure risk
9%
2%
86%
2%
2%
5%
91%
Currency risk 2% 11%
82%
Credit or counterparty risk 2% 7%
88%
Fundamental/systematic market risk 2% 9%
3%
86%
Asset Liability Matching risk 2% 7%
Political risk 7%
5%
3%
88%
14%
0%
3%
72%
20%
40%
7%
60%
Not confident
Confident
Relatively confident
Don’t know
80%
100%
Based on responses from 57 asset owners
South America
Solvency Capital Requirements risk
Liquidity risk
11%
Investment risk
11%
Operational risk
11%
Regulatory/Compliance risk
17%
Market infrastructure risk
17%
Currency risk
17%
Credit or counterparty risk
Fundamental/systematic market risk
Asset Liability Matching risk
Political risk
83%
6%
11%
17%
11%
78%
17%
0%
67%
16%
11%
67%
22%
5%
61%
28%
61%
78%
5%
17%
11%
72%
33%
50%
17%
20%
72%
40%
60%
Not confident
Confident
Relatively confident
Don’t know
80%
100%
Based on responses from 18 asset owners
¡ 23 ¡
Section 3
Techniques in managing
risks effectively
¡ 25 ¡
Section 3 – Techniques in managing risks effectively
Asset owners have an array of tools and techniques at their fingertips. We asked which add most
value to their overall risk objectives.
How do you rate the following techniques in helping
your organisation meet its overall risk objectives?
Risk analysis tools 1%
34%
Risk budgeting 2%
Asset liability management 3%
Provider/vendor management
42%
10%
1%
8%
3%
12%
3%
53%
39%
9%
44%
42%
11%
35%
43%
Hedging strategies 6%
41%
Smart beta strategies 6%
41%
0%
5% 1%
45%
33%
Dynamic asset allocation strategies 2%
Counterparty management
59%
20%
7%
24%
24%
21%
40%
60%
7%
14%
8%
17%
12%
21%
11%
80%
100%
Highly ineffective
Quite effective
Don’t know
Quite ineffective
Highly effective
Not applicable – we don’t
use this technique
Based on responses from 177 asset owners
Again, interviewees were able to give more than one response.
Risk analysis tools are considered the most effective techniques in general (93% of respondents
rated these as either ‘quite effective’ or ‘highly effective’).
Risk analysis tools cover a wide range of quantitative tools and techniques that support the
identification, analysis and prioritisation of investment and liquidity risk. These tools may
be accessed online and dynamic or they may be more traditional and maintained manually
e.g. spreadsheets.
Risk budgeting also scored highly (87% of respondents), particularly with pension funds.
Risk budgeting is a newer form of risk management. Essentially it is a plan for
determining the overall risk tolerance of an organisation – taking into account
rewarded and unrewarded risks – and then distributing that risk to each part of an
investment strategy.
Asset Liability Management (ALM) as a technique was particularly highly rated in North America
(69% of respondents rated this technique as ‘highly effective’) and South America (56% of
respondents rated this technique as ‘highly effective’). See appendices for the regional perspective.
¡ 26 ¡
Section 3 – Techniques in managing risks effectively
In its simplest form, ALM entails managing assets and cash inflows to satisfy various liabilities. It is a
form of risk management, where an organisation looks to mitigate or hedge the risk of failing to meet
these obligations. Generally, ALM has become a key part of a strategic risk management system.
Asset owners are least convinced of smart beta strategies. Asia Pacific in particular had a high number
of respondents (30%) who were uncertain as to how to rate the effectiveness of this technique.
However, though smart beta is a new approach for many asset owners and therefore its
effectiveness is not always clear, smart beta is gaining some industry traction. From a segment
perspective, pension funds are most likely to use smart beta and consider it effective (66% rated
this as ‘quite effective’ or ‘highly effective’) with official institutions the least likely to rate this
technique (only 52% rated this as ‘quite effective’ or ‘highly effective’).
There is a wide variety of smart beta strategies. Each essentially is a way to capture
returns by moving away from the traditional market-capitalisation weighted indices,
and instead focusing on alternative indexing methods.
With cap-weighted indices, weightings are based on stock prices and vary as prices
move. This carries limitations such as:
¡¡ Overweighting overvalued stocks or a bias towards larger-capitalisation
stocks and trending momentum, and vice-versa
¡¡ Concentration in a few sectors or stocks that may not represent the breadth
of an underlying economy
With smart beta, managers passively follow an index designed to take advantage
of perceived systematic biases or market inefficiencies. Examples include factor
investing, low-volatility investing, and can even be thematic such as providing
exposure to demographic trends.
Hedging strategies also received a mixed response, particularly in Asia Pacific. A significant number
of interviewees either do not use the technique (23%) of are unable to judge its effectiveness (26%).
Third parties can be viewed as an extension of an asset owner’s value chain and to some extent
an extension of the risk faced by the asset owner. In EMEA, counterparty management and vendor
management were considered to be the least effective techniques in meeting overall risk objectives.
From a segment perspective, counterparty management and vendor management were least likely
to score ‘highly effective’ amongst insurance companies, pension funds and official institutions. This
suggests there is some room for improvement in working with third parties as part of a holistic risk
framework. This leads us to our next section: Insourcing, outsourcing and managing counterparties.
¡ 27 ¡
Section 4
Insourcing, outsourcing and
managing counterparties
Section 4 – Insourcing, outsourcing and managing counterparties
Size of the organisation versus proportion of assets managed in-house
Total
Insurance companies
Pension funds
Official institutions
100%
80%
6%
25%
33%
38%
37%
45%
69%
60%
25%
33%
29%
40%
20%
88%
67%
30%
16%
6%
29%
27%
30%
16%
0%
35%
62%
64%
20%
Corporates
23%
19%
30%
25%
6%
4%
4%
6%
3%
2%
6%
13%
6%
Less than
USD 50bn AUM
More than
USD 50bn AUM
Less than
USD 50bn AUM
More than
USD 50bn AUM
Less than
USD 50bn AUM
More than
USD 50bn AUM
Less than
USD 50bn AUM
More than
USD 50bn AUM
15%
Less than
USD 50bn AUM
8%
Less than
USD 50bn AUM
Total AUM
Less than 25% AUM in-house
More than 75% AUM in-house
25-50% AUM in-house
Don’t know
50-75% AUM in-house
Based on responses from 177 asset owners
A significant proportion of asset owners conduct some part of their investment management
activities in-house. We found a clear correlation shown above between the size of an organisation’s
assets and the proportion of activities conducted in-house. In other words, organisations with
greater AUM tend to manage a greater proportion of their assets in-house.
Naturally trends in insourcing or outsourcing will depend upon the region and the segment. In
general however, asset owners have increasingly become asset managers or asset gatherers
over the past decade and particularly in the wake of the financial crisis. Often they will cover the
simplest asset classes in-house themselves and then move towards insourcing the more complex
asset classes.
Cost is one driver. A survey by CEM Benchmarking of 19 of the world’s largest pension funds
revealed that funds spend on average 46 bps on external asset managers versus 8 bps on internal
investment capabilities5, although the types of assets managed in-house will tend to be the
‘cheaper’ assets e.g. government bonds and developed market equities.
Other advantages to in-house investment management include reducing agency risk and being able
to make more agile and relevant investment decisions.
For asset managers, this implies a different type of relationship with asset owners including:
¡¡ increasing scrutiny on costs and on transparency
¡¡ greater opportunities for asset managers who can offer innovative investment solutions
5
CEM Study Reveals in-house savings’ Top 1000 Funds, 20 April 2012
¡ 29 ¡
Section 4 – Insourcing, outsourcing and managing counterparties
Counterparty selection
Asset owners are increasingly looking at counterparty selection. There are a number of drivers for this.
For one, as derivative strategies have become more commonplace, risk regulation has tightened,
as evidenced by a number of EU and OECD directives and guidelines requiring counterparties with
derivative contracts to provide collateral and report details to a trade repository.
Another driver lies in the regulatory and market push for increased transparency in selecting third
parties. Ultimately, ‘outsourcing’ cannot mean ‘getting rid of’. Most regulators are increasing the
pressure on asset owners and asset managers to ensure they have formal oversight of outsourced
functions. Market participants are pushing this forward too.
Which are the three most important criteria for your
organisation when selecting a counterparty?
We wanted to understand the key criteria applied by asset owners in selecting third parties,
including asset managers, custodians, banks and broker dealers, and collateral managers.
Financial stability
60%
Client service/
relationship management
42%
Market coverage
39%
Ability to customise solutions/product
flexibility/ability to innovate
38%
33%
Ability to help you deal with market changes
Breadth of services they can offer
30%
Internal risk policies and procedures
28%
Asset class coverage
Reciprocation
Don’t know
0%
19%
1%
2%
20%
40%
60%
It is fairly self-evident that asset owners can only do business in a sustainable manner with a
viable counterparty. For that reason financial stability is the key counterparty criterion (60% of
respondents) followed by client service/relationship management (42% of respondents).
¡ 30 ¡
80%
Section 4 – Insourcing, outsourcing and managing counterparties
The regional perspective: the top three criteria for counterparty selection
EMEA
North America
Financial stability
62%
Client service/relationship
management
37%
22%
Market coverage
Ability to customise
solutions/product
flexibility/ability
to innovate
47%
Breadth of services
they can offer
26%
Internal risk policies
and procedures
25%
0%
Market coverage
41%
34%
Ability to help you deal
with market changes
28%
Breadth of services
they can offer
28%
31%
21%
Reciprocation
1%
Don’t know
41%
Asset class coverage
3%
Reciprocation
Client service/relationship
management
Internal risk policies
and procedures
36%
Asset class coverage
66%
Ability to customise
solutions/product
flexibility/ability
to innovate
36%
Ability to help you deal
with market changes
Financial stability
Don’t know
20%
40%
60%
80%
Asia Pacific
0%
20%
40%
60%
80%
South America
Financial stability
51%
Financial stability
Client service/relationship
management
49%
Client service/relationship
management
54%
Market coverage
Ability to customise
solutions/product
flexibility/ability
to innovate
22%
Breadth of services
they can offer
28%
Internal risk policies
and procedures
23%
12%
Asset class coverage
44%
Ability to help you deal
with market changes
37%
Internal risk policies
and procedures
56%
Ability to customise
solutions/product
flexibility/ability
to innovate
21%
Breadth of services
they can offer
39%
Market coverage
40%
Ability to help you deal
with market changes
78%
11%
17%
Asset class coverage
Reciprocation
Reciprocation
4%
Don’t know
0%
20%
Don’t know
40%
60%
80%
0%
20%
40%
60%
80%
Though financial stability (cited by 51% of respondents) is a key criterion in Asia Pacific, this region
also values market coverage (54% of respondents cited this as a top three criteria).
¡ 31 ¡
Section 4 – Insourcing, outsourcing and managing counterparties
Asia Pacific is ‘fragmented’ in terms of markets (systems, processes, regulatory initiatives and
language). Therefore asset owners operating in several countries within the region require a
counterparty who:
¡¡ can offer comprehensive coverage (local connectivity and domestic presence) across the
region, so minimising operational risks and costs to the asset owner
¡¡ understands the myriad of regulatory initiatives that apply to the region
Market coverage is also highly valued in South America (56% of respondents). In this region, the
asset allocation of portfolios has in the past been focused on local markets and local securities.
Only in recent years have regulators relaxed the limits to allow a higher exposure to international
markets, in order to alleviate concentration and geographic risk.
Investment Risk Analytics
Risks still exist if you don’t measure them. They can however be controlled if you measure them.
Hence the need for investment risk analytics.
How frequently do you perform or receive investment risk analytics?
100%
EMEA
North America
80%
South America
Asia Pacific
60%
60%
40%
37% 38%
33%
38%
33%
25%
23%
20%
17%
17%
11%
7%
7%
2%
0%
Daily
Weekly
14%
11%
Monthly
7%
3%
2%
Quarterly
B-annually
Annually
1%
3%
4%
1%
on an ad-hoc basis
Never
7%
Don't know
Based on responses from 177 asset owners
Asset owners in Asia Pacific are most likely to perform or receive daily reporting. This is consistent
with our experience in the region. We think this is driven by a number of factors:
¡¡ the highly fragmented nature of the region
¡¡ the vast range of investment opportunities within the region
¡¡ the need to consolidate risk analysis across multiple providers and asset classes
¡¡ increasing regulatory pressure therefore driving best practices in the region
¡ 32 ¡
Section 4 – Insourcing, outsourcing and managing counterparties
Do you use an external provider to create
the investment risk analytics?
There are a number of reasons as to why asset owners may use external providers to create their
investment risk analytics reporting. These include:
¡¡ independence of the results
¡¡ complementing internal capabilities
¡¡ potential penalties from the regulator. Naturally this depends on the location and the type
of asset owner. Many pension funds need to report information to regulators on a frequent
basis, and failure to do so can lead to penalties
63% of respondents are using external providers for some if not all of their analytics.
6%
9%
31%
54%
Yes – for all of it
No
Yes – for some of it
Don’t know
Based on responses from 177 asset owners
¡ 33 ¡
Section 4 – Insourcing, outsourcing and managing counterparties
The regional perspective: do you use an external provider to create the investment
risk analytics?
In terms of whether asset owners are using an external provider for their investment risk analytics,
here results diverged by region. EMEA is most likely to use an external provider for part of their
analytics (68% of respondents), followed by South America (50% of respondents) and Asia Pacific
(45% of respondents). This suggests that providers should continue to take a modular, flexible
approach in the services that they offer, in order that some analysis can be retained in-house.
100%
80%
68%
60%
50%
48%
45%
44%
40%
43%
37%
23%
20%
15%
9%
6%
10%
2%
0%
Yes – for
all of it
Yes – for
some of it
EMEA
South America
North America
Asia Pacific
No
Don’t know
Based on responses from 177 asset owners
A relatively high proportion in North America and Asia Pacific create their risk analytics entirely
in‑house (North America 48% and Asia Pacific 43%), most likely explained by the interviewee profile
in those regions, particularly the size of the organisations by AUM and that larger institutions tend
to manage their risk analytics in-house.
South America however was more likely to outsource entirely (44% of respondents). This may be
reflective of the pension funds base among our interviewees in that region and the greater reliance
on external expertise.
Data and input to the analytics may come from multiple sources, with asset managers and
specialist consultants providing the analysis, risk benchmarks and methodologies. Overall, the
findings indicate there is room for asset managers to differentiate themselves through reporting
techniques, frequency of reporting, and greater transparency of data and methodology.
For service providers offering analytic software or tools, those offering advanced tools are well
positioned to support asset owners and particularly those providers who can cover the complexity
of asset class structures being used. Naturally asset owners do not always wish to be over-reliant
on service providers. As such, a hybrid model may continue, with service providers offering superior
technology and knowledge resources, complemented by in-house analytics teams. This would be an
effective approach to maximising analytics while minimising counterparty dependency.
¡ 34 ¡
Section 5
Uncovering risk analytics
¡ 35 ¡
Section 5 – Uncovering risk analytics
We wanted to better understand what is actually being included in the risk reporting.
RISK MEASURES
Asset owners are exposed to many types of risk. It is critical for them to be aware of
the inherent risks within any portfolio. To that end, they use a variety of techniques.
These include ex-post and ex-ante risk measures.
Ex-post risk measures calculate the market risk of an investment based on the
historical changes in investment performance returns. They can be calculated at a
variety of aggregation levels, for example at the investment manager level, asset
class level, or security level.
Some of the most commonly used ex-post risk measures include standard deviation,
tracking error, Sharpe ratio and information ratio.
Ex-ante or forward looking risk is a method for assessing the risk profile of a fund.
Ex-ante uses current asset exposure, current volatility and current correlation
between assets. Ex-ante risk measures require complex calculations to predict the
future profit and loss of a fund.
Another important component of ex-ante risk analysis is stress testing. Stress
testing indicates the potential losses of a fund under extreme market conditions.
There are a variety of other risk measures in use, including liquidity risk and newer
techniques such as ESG (Environmental, Social and Governance) scores.
What is currently included in your investment risk analytics?
74%
Liquidity risk
Stress testing
66%
Value at risk
66%
Risk attribution
63%
Exposure (by sector/by country/by issuer)
63%
Sensitivity analysis
63%
62%
Aggregated risk analytics covering
60%
IRR & multiples on private equity
Ex-post measures
57%
Environmental, Social and
Governance scores
54%
48%
Ex-ante measures
Prefer not to say
Don’t know
6%
1%
0%
Based on responses from 177 asset owners
¡ 36 ¡
20%
40%
60%
80%
100%
Section 5 – Uncovering risk analytics
In terms of the risk measurements employed, liquidity risk (74% of respondents), stress testing
(66% of respondents) and value at risk (66% of respondents) were the top three methods cited.
62% of respondents indicated that they perform aggregated risk analytics, covering all asset
classes, including alternatives. From this, we can interpret, that as asset owners increasingly look
to non‑traditional asset classes, they will require risk analytics capabilities that take account of the
full spectrum of assets.
Although ESG (Environmental, Social and Governance) scores seem to be gaining traction in
investment management generally, this method was only cited by 54% of respondents.
The segment perspective: What is currently included in your investment risk analytics?
100%
88%
83%
83%
80%
79%
76%
73%
70%
64%
60%
75%
71%
71%
69%
71%
79%
75%
75%
71%
68%
64%
64%
64%
64%
71%
71%
71%
71%
64%
65%
67%
61%
57%
54%
52%
52%
46%
58%
57%
56%
50%
46%
41%
40%
38%
39%
25%
20%
9%
5%
0%
Liquidity risk Stress testing Value at risk Risk attribution Exposures
(by sector/
by country/
by issuer)
Sensitivity
analysis
Insurance companies
Official institutions
Pension funds
Corporates
Aggregated
risk analytics
covering all
asset classes
including
alternatives
IRR and
multiples on
private equity,
infrastructure
and property
investments
Ex-post Environmental,
measures
Social and
Governance
scores
Ex-ante
measures
4% 4%
Prefer not
to say
2%
4%
Don’t know
Based on responses from 177 asset owners
Information on liquidity risk is more likely to appear in the risk analytics reporting for pension funds,
insurance companies and official institutions, than any other type of risk measurement. Use of
liquidity risk was particularly high for official institutions with 88% of respondents in this segment
reporting use of this technique.
For insurers, matching the timing of asset cash flows to expected liability cash flows is a key
consideration and the increasing prevalence of risk-based capital (RBC), increases the emphasis on
the importance of appropriate matching. Examples of regulatory pushes in this direction include
Solvency II in Europe and various Solvency II-like requirements in Asia Pacific (for example the
Japan Financial Services Agency (JFSA) has put in place additional reporting around solvency capital
requirements and China is in consultation to address solvency management with a conceptual
framework of the “China Risk Oriented Solvency System” (C-ROSS).
Pension funds reported less use of the range of analytical techniques and risk measures than other
segments. This suggests that the segment is slightly less sophisticated for the time being as regards
the risk management tools they are using.
¡ 37 ¡
Section 5 – Uncovering risk analytics
Among respondents, official institutions stand out as the leaders of employing ESG scores in
their investment risk analytics (cited by 74% of official institutional investors). This suggests that
governments are not only advancing in this area but that there will be a future need for other
segments to follow suit.
From a regional perspective, EMEA and Asia Pacific in particular reported use of an array of tools and
risk measurement techniques. This really demonstrates that there is no one-size-fits-all answer for
asset owners - they need to have many tools and approaches to measure and manage risk. This is
particularly the case as they continue to invest into alternatives.
In South America, 83% of respondents reported that liquidity risk features in their investment
analytics. This may reflect the high number of pension fund respondents in their region and
regulatory constraints for that segment (i.e. regulators in particular honing in on liquidity risk for
pension funds). Asset owners from the EMEA and Asia Pacific regions (59% of respondents in both
regions) employ ESG scores more readily than those in North and South America, again suggesting
a regional difference in this regard.
Who are the main users of your investment risk reports?
C-suite management
(COO, CEO, CFO, CRO, CIO)
87%
56%
Board/Trustees
50%
Operations
Middle office
Front office
Back office
0%
19%
15%
13%
20%
40%
60%
80%
100%
Based on responses from 177 asset owners
Overwhelmingly the C-Suite (CEO, CFO, CRO etc.) is the major audience for investment risk reports
both across regions and across segments. The high level of C-Suite users demonstrates greater
connectivity of risk management at the top of the house, the heightened regulatory scrutiny in recent
years of financial institutions, and the accountability placed on senior executives in understanding
risk within the organisation.
¡ 38 ¡
Section 6
Asset allocation strategy –
review, reporting and
monitoring investment risks
¡ 39 ¡
Section 6 – Asset allocation strategy – review, reporting and monitoring investment risks
Reviewing asset allocation strategies is one key use of risk analytics.
How often to you formally review your asset allocation strategy?
At least twice a year
63%
Annually
Less frequently
27%
2%
Don’t know
0%
8%
20%
40%
60%
80%
100%
Based on responses from 177 asset owners
Most respondents (63%) formally review asset allocation strategies at least twice a year. Many
asset owners will even be conducting monthly strategic reviews as they move to more active
management of risk.
Surprisingly over a quarter of respondents (27%) are still reviewing strategically only on an annual
basis. This suggests that some asset owners have some way to go in taking a more active approach
to ensuring they are effectively reducing exposures.
Interestingly, we found a correlation between the frequency of the asset allocation reviews and
the proportion of AUM managed in-house (essentially the higher the proportion of AUM managed
in‑house, the more frequent asset allocation strategies are reviewed). This suggests there is room
for third parties and asset managers to help asset owners reduce risk and support more frequent
asset allocation reviews.
¡ 40 ¡
Section 6 – Asset allocation strategy – review, reporting and monitoring investment risks
Which are the most important methods for monitoring investment
risk? And which one do you see as the most important?
63%
Liquidity risk analysis
20%
Historical risk measures (standard deviation,
Sharpe ratio, information ratio, etc.)
Models such as Value at Risk,
risk decomposition, tail risk
54%
8%
50%
20%
48%
Stress testing including sensitivity analysis
22%
Exposure reporting, to show issuer/sector/
country exposures and concentration risk
41%
22%
Simulation model such as
Monte Carlo analysis
35%
4%
30%
Sustainability scores
2%
Don’t know
6%
0%
20%
40%
60%
80%
100%
Important
The most important
Based on responses from 177 asset owners
While there is no consensus around one clear method of monitoring investment risk, one in five
asset owners report stress testing, exposure reporting, liquidity risk analysis and models such as
values at risk as the most important methods.
The regional perspective: the most important methods for monitoring investment risk
100%
EMEA
88%
83%
80%
80%
North America
80%
80%
South America
75%
Asia Pacific
67%
60%
60%
60%
60%
50% 50%
60%
50%
46%
40%
42%
40%
38%
33%
36%
33%
33%
25%
25% 25%
21%
20%
20%
17%
13%
8%
0%
Liquidity risk
analysis
Historical risk
Models such as Value
measures (standard
at Risk, risk
deviation, Sharpe
decomposition,
ratio, information
tail risk
ratio, etc.)
Stress testing
including
sensitivity
analysis
Exposure reporting to Simulation models
show issuer/sector/ such as Monte Carlo
country exposures
analysis
and concentration
risk
Sustainability
scores
Don't know
Based on responses from 177 asset owners
¡ 41 ¡
Section 6 – Asset allocation strategy – review, reporting and monitoring investment risks
Views differed by region with EMEA overall less convinced of the efficacy of methods typically used
in monitoring investment risk. This is despite the wide variety of analytics that they use. Far more
positive was Asia Pacific particularly on exposure reporting, historical risk measures and liquidity
risk analysis.
The regional perspective: the most important method for monitoring investment risk
60%
EMEA
North America
50%
South America
45%
Asia Pacific
40%
38%
38%
33%
29%
30%
27%
24%
22%
20%
33%
13%
10%
22%
19%
18%
13%
10%
10%
9%
5%
5%
0%
Liquidity risk
analysis
Historical risk
Models such as Value
measures (standard
at Risk, risk
deviation, Sharpe
decomposition,
ratio, information
tail risk
ratio, etc.)
Stress testing
including
sensitivity
analysis
Exposure reporting to Simulation models
show issuer/sector/ such as Monte Carlo
country exposures
analysis
and concentration
risk
Sustainability
scores
Don't know
Based on responses from 177 asset owners
We noticed a major difference in regions, with almost half of North American asset owners
considering liquidity risk analysis as the most important method (45% of respondents). Asset owners
in South America were particularly impressed with stress testing including sensitivity analysis (38%
of respondents), and exposure reporting (38% of respondents).
60%
Insurance companies
Pension funds
50%
Official institutions
42%
Corporates
40%
38%
33%
30%
25%
25%
17%
13%
10%
0%
17%
6%
Historical risk
Models such as Value
measures (standard
at Risk, risk
deviation, Sharpe
decomposition,
ratio, information
tail risk
ratio, etc.)
Based on responses from 177 asset owners
¡ 42 ¡
17%
17%
17%
13%
8%
Liquidity risk
analysis
27%
20%
19%
20%
27%
6%
Stress testing
including
sensitivity
analysis
8%
8%
Exposure reporting to Simulation models
show issuer/sector/ such as Monte Carlo
country exposures
analysis
and concentration
risk
Sustainability
scores
Don't know
Section 6 – Asset allocation strategy – review, reporting and monitoring investment risks
From a segment perspective, stress testing is more important to insurance companies than any
other segment. Liquidity risk analysis was cited by a third of official institution respondents.
Simulation models were surprisingly not cited as key by insurance companies or pension funds.
Sustainability scores are key for almost one in five official institutions. This correlates to our
previous findings on the importance of ESG for government institutions. We are seeing this trend
especially within developed countries and we think there will be a three to five year plan for greater
ESG reporting within emerging countries.
Which of the following performance measures
do you use most frequently?
Risk-adjusted measures
46%
Tailored benchmarks including
smart benchmarks
44%
Public benchmarks
37%
Consultant ratings
35%
Peer groups (i.e. quartile)
31%
Measures against our liabilities
22%
Absolute return (post tax) measures
Don’t know
19%
2%
0%
10%
20%
30%
40%
50%
60%
Based on responses from 177 asset owners
The key finding in terms of investment risk measures is that tailored benchmarks have gained
popularity over public benchmarks.
Levels of satisfaction/dissatisfaction with investment risk analytics
No respondent expressed dissatisfaction with his/her investment risk analytics. We noted numerous
comments from respondents about investment risk analytics being holistic and supporting innovation.
“
Our investment risk analytics focus on our
company as a whole, including products,
services and transactions. This holistic
approach gives us insights into different
types of risk, so that we can make informed
strategic and business decisions
Investment manager, insurance
company, Singapore
Sometimes we do include all of the different risk
measures you mentioned in our analytics. But we
tend to only focus on the more important measures
for our organisation
C-Suite executive, pension fund,
Nordics
We have a dedicated team who work very
efficiently on risk reporting requirements,
taking into account all regulatory
requirements. Their analyses are realistic and
forward-looking, which helps us innovate
Compliance manager, insurance
company, Australia
¡ 43 ¡
Section 7
The next phase of risk
management
Section 7 – The next phase of risk management
“The future belongs to those who believe
in the beauty of their dreams”
Eleanor Roosevelt
Asset owners have advanced monitoring and investment tools and techniques at their fingertips,
they are confident in how they are handling a variety of risks, and on the whole they are satisfied
with their risk reporting.
So what about the future?
In your opinion, which of the following will be
the next phase of risk management?
Tools that help aggregate all aspects of risk –
operational, credit, market etc.
43%
Increased transparency around investments
(alternative investments commingled
vehicles and derivatives)
24%
Increased detail – on counterparties, derivative
notional values, ultimate issuer concentration
15%
Focus on Environmental, Social Governance issues
12%
Other
1%
None of these
1%
Don’t know
0%
3%
10%
20%
30%
40%
50%
60%
Based on responses from 177 asset owners
Just over two in five asset owners (43% of respondents) anticipate that the next phase of risk
management will focus on tools that help aggregate all aspects of risk, be it operational, credit
or market risk, etc. This is followed by increased transparency around investments (24% of
respondents), including alternatives and commingled vehicles.
¡ 45 ¡
Section 7 – The next phase of risk management
There are a number of possible drivers to this:
¡¡ regulators are already asking for credit, market, liquidity, and counterparty risk measures.
However, no tool has, so far, been able to effectively aggregate all of these to allow asset
owners to more actively engage with risk management
¡¡ the ongoing focus on liquidity risk since the financial crisis (and continuing into a
prolonged low yield environment), which is driving the need for increased transparency
around investments
¡¡ asset owners need useful data inputs and the right tools for their analytics. They also need
ways to accommodate new asset classes and time to assemble data so that risk reporting
and analytics remains timely and effective
In our view, the next phase of risk management is one where providers will differentiate themselves
further by developing consolidation tools for asset owners that:
¡¡ encompass all risk elements required by asset owners including risk reporting, risk
analytics, performance attribution, and compliance, and across all asset classes
¡¡ provide a single source of investment data and analytics for a holistic view of multiple risks
¡¡ are accessed interactively and dynamically
¡¡ offer a user experience based on the role of the individual
¡¡ contribute to a shared view of risk throughout the organisation
¡¡ include ESG and non-traditional financial attributes, thereby increasing the scope of risk
management to include the sustainability of investments
¡ 46 ¡
About BNP Paribas
¡ 47 ¡
About BNP Paribas
About BNP Paribas
The bank for a changing world
BNP Paribas has a presence in 75 countries with more than 185,000 employees, including 145,000
in Europe. It ranks highly in its two core activities: Retail Banking & Services (comprised of Domestic
Markets and International Financial Services) and Corporate & Institutional Banking. In Europe,
the Group has four domestic markets (Belgium, France, Italy and Luxembourg) and BNP Paribas
Personal Finance is the leader in consumer lending. BNP Paribas is rolling out its integrated
retail banking model across Mediterranean basin countries, in Turkey, in Eastern Europe and a
large network in the western part of the United States. In its Corporate & Institutional Banking
and International Financial Services activities, BNP Paribas also enjoys top positions in Europe,
a strong presence in the Americas and solid and fast-growing businesses in Asia-Pacific. Its strong
commitment to servicing institutional clients is supported by many of its subsidiaries including
BNP Paribas Global Markets, Securities Services, Investment Partners and Read Estate.
About BNP Paribas Securities Services
BNP Paribas Securities Services, a wholly-owned subsidiary of the BNP Paribas Group, is a leading
global custodian and securities services provider backed by the strength of a universal bank. It
provides integrated solutions for all participants in the investment cycle, from the buy-side and
sell-side to corporates and issuers.
Covering over 100 markets, with our own offices in 34 countries, the BNP Paribas network is one of
the most extensive in the industry. We bring together local insight and a global network to enable
clients to maximize their market and investment opportunities worldwide.
Key figures as of 31 December 2014: USD 8.95 trillion assets under custody, USD 1.717 trillion
assets under administration, 8,134 administered funds and 8,800 employees
About our risk and performance solutions
We work with some of the world’s leading asset owners. Over the years, to better service this
community, we have developed a range of flexible performance and risk analysis solutions which cover:
¡¡ Performance and ex-post risk measurement
¡¡ Investment and portfolio reviews
¡¡ Performance attribution including fixed income specialisation
¡¡ Value-at-risk analysis
¡¡ Ex ante risk attribution
¡¡ Scenario analysis and stress testing
¡¡ Liquidity risk analysis
¡¡ Peer group analysis
Solutions are proprietary to BNP Paribas and benefit from our group wide research and commitment
to continuous development.
We offer a complete service, not just software, and work with our clients as strategic partners in
bringing together our global solutions combined with local expertise and client service.
¡ 48 ¡
About BNP Paribas
About our thought leadership
We develop thought leadership in-house and in collaboration with key partners. Some of our most
recent publications include:
¡¡ 2025 Outlook for Asset Owners and Managers (in conjunction with Australian Institute of
Superannuation Trustees)
¡¡ Middle and back office outsourcing (in conjunction with YouGov)
¡¡ Trends in asset allocation and risk management: the Asia Pacific asset owner experience
We also have our Quintessence (Smart thinking in Finance) brand, which is all about developing the
insights that come out of the daily tasks.
To find out more visit us on our website, Twitter or LinkedIn.
BNP Paribas Contacts
Europe, Middle East and Africa
Valérie Nicaise, Head of IRP Solutions, BNP Paribas Securities Services
Tel: +33 1 40 14 44 84 Email: [email protected]
Dietmar Roessler, Head of Client Segment, Asset Owners, BNP Paribas Securities Services
Tel: +49 69 1520 5217 Email: [email protected]
Mark Schoen, Head of Asset Owner Solutions, BNP Paribas Securities Services
Tel: +44 207 595 3685 Email: [email protected]
Americas
Claudine Gallagher, Head of North America, BNP Paribas Securities Services
Tel: +1 212 471 6458 Email: [email protected]
Alvaro Camunas, Head of Spain, Portugal and Latin America, BNP Paribas Securities Services
Tel: +34 913 88 87 87 Email: [email protected]
Asia Pacific
Lawrence Au, Head of Asia Pacific, BNP Paribas Securities Services
Tel: +852 3197 3309 Email: [email protected]
Madhu Gayer, Head of IRP Solutions, Asia, BNP Paribas Securities Services
Tel: +65 6210 4964 Email: [email protected]
David Raccat, Head of Market and Financing Services, Asia Pacific, BNP Paribas Securities Services
Tel: +65 6210 1663 Email: [email protected]
¡ 49 ¡
About YouGov Plc
About YouGov Plc
The company
Founded in London in 2000, YouGov is considered the pioneer of online market research. Now with
offices throughout the UK, the United States, Europe, the Middle East, Africa and Asia, YouGov was
recently named one of the world’s top 25 research companies by the respected American Marketing
Association Top 25.
What the world thinks
From the very beginning, we have been driven by one simple idea: the more people participate in
the decisions made by the institutions that serve them, the better those decisions will be. We are
constantly engaged in developing new technologies and methodologies to enable collaborative
decision-making.
At the heart of the company is a global online community of some 3 million respondents
and thousands of political, cultural and commercial organisations, engaged in a continuous
conversation about their beliefs, their behaviours and their brands. In 12 months leading up to
31 July 2013, members of the YouGov panel completed more than 17 million surveys (an increase
of more than 13%). The result: YouGov’s proven, published record of uniquely accurate data and
actionable insights.
¡ 51 ¡
Appendices
¡ 53 ¡
Appendices
Institutional profile per region
EMEA
Other
3%
Private Corporate
30%
Family Office
1%
Foundation/Charitable Trust
1%
Government/Central Bank
Sovereign Wealth Fund
15%
1%
25%
Pension/Retirement Fund
Insurance Company
23%
0%
10%
20%
30%
40%
North America
Government/Central Bank
7%
Pension/Retirement Fund
24%
Insurance Company
69%
0%
20%
40%
60%
80%
100%
Asia Pacific
Other
2%
Private Corporate
9%
Government/Central Bank
Sovereign Wealth Fund
14%
4%
Pension/Retirement Fund
30%
Insurance Company
0%
¡ 54 ¡
42%
10%
20%
30%
40%
50%
Appendices
South America
Government/Central Bank
6%
Pension/Retirement Fund
94%
0%
20%
40%
60%
80%
100%
Assets Under Management (AUM) by region
EMEA
More than USD 50bn
36%
USD 30bn-USD 50bn
4%
USD 20bn-USD 30bn
4%
USD 10bn-USD 20bn
11%
USD 5bn-USD 10bn
12%
33%
USD 1bn-USD 5bn
0%
10%
20%
30%
40%
50%
North America
More than USD 50bn
USD 30bn-USD 50bn
USD 20bn-USD 30bn
69%
7%
10%
USD 10bn-USD 20bn
USD 5bn-USD 10bn
7%
USD 1bn-USD 5bn
7%
0%
20%
40%
60%
80%
100%
¡ 55 ¡
Appendices
Asia Pacific
More than USD 50bn
USD 30bn-USD 50bn
54%
4%
USD 20bn-USD 30bn
5%
USD 10bn-USD 20bn
5%
USD 5bn-USD 10bn
18%
14%
USD 1bn-USD 5bn
0%
20%
40%
60%
80%
100%
South America
More than USD 50bn
11%
USD 30bn-USD 50bn
USD 20bn-USD 30bn
11%
USD 10bn-USD 20bn
11%
USD 5bn-USD 10bn
22%
44%
USD 1bn-USD 5bn
0%
10%
20%
30%
40%
50%
How are you addressing a continuing low yield environment?
100%
EMEA
83%
North America
80%
South America
66%
61%
60%
Asia Pacific
60%
51%
40%
32%
30%
28%
26%
21%
20%
10% 10%
6%
0%
¡ 56 ¡
16%
New/increased exposure
to alternative assets
17%
14%
9%
9%
7%
9%
3%
New/increased exposure to
emerging markets
Use of active/alpha
strategies
Enhancing return from our
current investments e.g.
lending securities, enhanced
cash management
Other strategy
Don’t know
Appendices
How do you rate the following techniques in helping your organisation meet its overall
risk objectives?
EMEA
Risk analysis tools
30%
67%
Risk budgeting 3%
44%
Asset liability management 1% 7%
14%
Provider/vendor management
43%
Smart beta strategies 7%
44%
0%
20%
7%
38%
42%
8%
4%
38%
44%
11%
3% 1%
48%
51%
Counterparty management
Hedging strategies
49%
37%
Dynamic asset allocation strategies 1%
3%
3%
3% 1%
29%
11%
29%
7%
12%
23%
40%
3%
8%
18%
60%
8%
80%
100%
Highly ineffective
Quite effective
Don’t know
Quite ineffective
Highly effective
Not applicable – we don’t
use this technique
North America
Risk analysis tools 4%
41%
Risk budgeting
38%
Asset liability management
Provider/vendor management 7%
Smart beta strategies
0%
24%
24%
33%
28%
20%
7%
17%
40%
60%
14%
21%
7%
21%
7%
17%
80%
3%
4%
14%
28%
41%
21%
7%
41%
48%
10%
14%
69%
38%
Counterparty management 3%
3% 4%
48%
21%
Dynamic asset allocation strategies 3%
Hedging strategies
48%
17%
100%
Highly ineffective
Quite effective
Don’t know
Quite ineffective
Highly effective
Not applicable – we don’t
use this technique
¡ 57 ¡
Appendices
Asia Pacific
Risk analysis tools
26%
Risk budgeting 2%
31%
Asset liability management
Counterparty management 7%
25%
12%
38%
0%
11%
40%
35%
Smart beta strategies
17%
40%
11%
40%
3%
14%
14%
26%
23%
20%
3%
18%
60%
28%
Hedging strategies 4%
21%
49%
18%
2%
9%
46%
30%
Dynamic asset allocation strategies 2%
Provider/vendor management
63%
10%
23%
30%
60%
9%
80%
100%
Highly ineffective
Quite effective
Don’t know
Quite ineffective
Highly effective
Not applicable – we don’t
use this technique
South America
Risk analysis tools
67%
33%
Risk budgeting 5%
78%
Asset liability management
44%
Dynamic asset allocation strategies 5%
22%
17%
11%
55%
56%
20%
17%
11%
40%
11%
6% 11% 6%
83%
Smart beta strategies
¡ 58 ¡
17%
72%
Hedging strategies
0%
56%
61%
Counterparty management 6%
Provider/vendor management
17%
60%
11%
22%
80%
100%
Highly ineffective
Quite effective
Don’t know
Quite ineffective
Highly effective
Not applicable – we don’t
use this technique
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BNP Paribas Securities Services
@BNPP2S
youtube.com/BNPParibasSecurities
The information contained within this document (‘information’) is believed to be reliable but BNP Paribas Securities Services does not warrant its completeness or accuracy. Opinions
and estimates contained herein constitute BNP Paribas Securities Services’ judgment and are subject to change without notice. BNP Paribas Securities Services and its subsidiaries
shall not be liable for any errors, omissions or opinions contained within this document. This material is not intended as an offer or solicitation for the purchase or sale of any financial
instrument. For the avoidance of doubt, any information contained within this document will not form an agreement between parties. Additional information is available on request
BNP Paribas Securities Services is incorporated in France as a Partnership Limited by Shares and is authorised and supervised by the ACPR (Autorité de Contrôle Prudentiel et de
Résolution) and the AMF (Autorité des Marchés Financiers).
BNP Paribas Securities Services, London branch is authorised by the ACPR, the AMF and the Prudential Regulation Authority and is subject to limited regulation by the Financial
Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority and regulation by
the Financial Conduct Authority are available from us on request. BNP Paribas Securities Services, London branch is a member of the London Stock Exchange. BNP Paribas Trust
Corporation UK Limited (a wholly owned subsidiary of BNP Paribas Securities Services), incorporated in the UK is authorised and regulated by the Financial Conduct Authority.
In the U.S., BNP Paribas Securities Services is a business line of BNP Paribas which is incorporated in France with limited liability. Services provided under this business line, including
the services described in this document, if offered in the U.S., are offered through BNP Paribas, New York Branch (which is duly authorized and licensed by the State of New York
Department of Financial Services); if a securities product, through BNP Paribas Securities Corp. or BNP Paribas Prime Brokerage, Inc., each of which is a broker‑dealer registered with
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