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Views from  the Dark Side   Bill Martin - Global Head of Investment Risk GARP/ISDA Risk Forum 19 December 2001
Views from  the Dark Side <ul><li>The  Dark Side  refers to the “Buy” side </li></ul><ul><ul><li>Investment Management </l...
Views from  the Dark Side <ul><li>Traditionally, the leaders of “risk management” have come from the “Sell” Side of  </li>...
Views from  the Dark Side <ul><li>What would one expect from a “Sell Side” risk manager: </li></ul><ul><ul><li>Specialist ...
Views from  the Dark Side <ul><li>What would one expect from a “Sell Side” risk manager: </li></ul><ul><ul><li>Specialist ...
Views from  the Dark Side <ul><li>In moving to the Sell Side: </li></ul><ul><li>Is this appropriate? Is it sustainable? </...
Views from  the Dark Side <ul><li>The big deal? </li></ul><ul><ul><li>O </li></ul></ul><ul><ul><li>P </li></ul></ul><ul><u...
Views from  the Dark Side <ul><li>The big deal?: </li></ul><ul><li>Other </li></ul><ul><li>People’s </li></ul><ul><li>Mone...
Views from  the Dark Side <ul><li>What do they want?: </li></ul><ul><ul><li>Performance </li></ul></ul><ul><ul><ul><li>Abs...
Views from  the Dark Side <ul><li>Investment Management - the challenge: </li></ul><ul><ul><li>To deliver superior investm...
Views from  the Dark Side <ul><li>Investment Risk - the challenge: </li></ul><ul><ul><li>To design and implement an approa...
Views from  the Dark Side <ul><li>Global Investment Management Process: </li></ul>Macro research & asset allocation Micro ...
Views from  the Dark Side <ul><li>Investment Risk – how would you define it: </li></ul><ul><ul><li>As an investor: </li></...
Views from  the Dark Side <ul><li>Investment Risk – how would you define it: </li></ul><ul><ul><li>As a risk manager: </li...
Views from  the Dark Side <ul><li>Investment Risk – What are the Strategic Objectives?: </li></ul><ul><ul><li>Play an acti...
Views from  the Dark Side <ul><li>Global Investment Management Process: </li></ul>Buy  List – Credit Risk Assessment Volat...
Views from  the Dark Side <ul><li>Investment Risk – What are the Strategic Objectives?: </li></ul><ul><ul><li>Embed a stro...
Views from  the Dark Side <ul><li>Investment Risk – What are the Strategic Objectives?: </li></ul><ul><ul><li>Define clear...
Views from  the Dark Side <ul><li>Investment Risk – What are the Strategic Objectives?: </li></ul><ul><ul><li>Play an acti...
Views from  the Dark Side <ul><li>Investment Risk – What is the end game? </li></ul><ul><ul><li>T o minimize the firm’s ex...
Views from  the Dark Side <ul><li>Do we design by risk type?: </li></ul><ul><ul><li>Specialist expertise by risk disciplin...
Views from  the Dark Side <ul><li>Do we design by specialisation?: </li></ul><ul><ul><li>Specialist expertise by asset cla...
Views from  the Dark Side <ul><li>The design: </li></ul>Portfolio Construction Investment Risk Policy (Minimum Standards) ...
Views from  the Dark Side <ul><li>Contribution, Attribution and Performance Analysis </li></ul><ul><ul><li>Contribution – ...
Views from  the Dark Side <ul><li>Product & Style Integrity Analysis </li></ul><ul><ul><li>Marketing Proposition is “Multi...
Views from  the Dark Side <ul><li>Risk-adjusted Portfolio Analysis </li></ul><ul><ul><li>Practical Application of Risk Spe...
Views from  the Dark Side <ul><li>Risk-adjusted Portfolio Analysis (continued) </li></ul><ul><ul><li>Practical Application...
Probability distribution of P&L's Probability Monthly Performance (%) + - 0 5% chance of  unexpected loss 5% chance of  un...
Risk-Return -5% 5% 15% 25% 35% 45% 0% 20% 40% 60% 80% 100% 120% 140% Risk (% Equity) Mean Return (% Equity)
Risk Appetite and Unexpected Volatility Risk (% Equity) Mean Return (% Equity)
Risk Adjusted Performance Measurement EL 99 % Base Probability Density Loss  £m  Base Case
Risk Adjusted Performance Measurement  EL  99 % Base New Profile Probability Density Loss  £m  Adjusted Profile
Views from  the Dark Side <ul><li>Investment Risk - the challenge: </li></ul><ul><ul><li>To design and implement an approa...
Views from  the Dark Side <ul><li>Investment Management - the challenge: </li></ul><ul><ul><li>To deliver superior investm...
Views from  the Dark Side <ul><li>At Invesco: </li></ul><ul><ul><li>“ All we do is invest” </li></ul></ul>
Views from  the Dark Side   Bill Martin - Global Head of Investment Risk GARP Risk Forum 19 December 2001
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  • NK: “To describe fully the risk of the portfolio we need this whole distribution. However, to put a monetary value on this, we choose some probability, e.g. 5%, and compute what is the net loss that could exceed this probability. On this example there is a 5% chance of losing more than £15m.”
  • Transcript of "- Presentation slides by Bill Martin - 19 Dec 01"

    1. 1. Views from the Dark Side Bill Martin - Global Head of Investment Risk GARP/ISDA Risk Forum 19 December 2001
    2. 2. Views from the Dark Side <ul><li>The Dark Side refers to the “Buy” side </li></ul><ul><ul><li>Investment Management </li></ul></ul><ul><ul><li>Asset Management </li></ul></ul><ul><ul><li>Fund Management </li></ul></ul><ul><li>Why “ the Dark Side ”? </li></ul><ul><ul><li>” Accept the power of the Dark Side ” </li></ul></ul><ul><ul><ul><li>Darth Vader to Luke Skywalker – Star Wars IV </li></ul></ul></ul>
    3. 3. Views from the Dark Side <ul><li>Traditionally, the leaders of “risk management” have come from the “Sell” Side of </li></ul><ul><li>investment banks </li></ul><ul><ul><li>Mark-to-Market </li></ul></ul><ul><li>followed by commercial banks, </li></ul><ul><ul><li>Traditional credit expertise </li></ul></ul><ul><li>followed by consultants, </li></ul><ul><li>advisors, </li></ul><ul><li>academics, </li></ul><ul><li>rocket scientists, </li></ul><ul><li>IT propeller heads, </li></ul><ul><li>We created an Industry! </li></ul>
    4. 4. Views from the Dark Side <ul><li>What would one expect from a “Sell Side” risk manager: </li></ul><ul><ul><li>Specialist expertise by risk discipline: </li></ul></ul><ul><ul><ul><li>Market Risk </li></ul></ul></ul><ul><ul><ul><li>Credit Risk </li></ul></ul></ul><ul><ul><ul><li>Operational Risk </li></ul></ul></ul><ul><ul><ul><li>(maybe) Portfolio Management </li></ul></ul></ul><ul><ul><ul><li>Regulatory Issues/Basle II </li></ul></ul></ul>
    5. 5. Views from the Dark Side <ul><li>What would one expect from a “Sell Side” risk manager: </li></ul><ul><ul><li>Specialist expertise by asset class: </li></ul></ul><ul><ul><ul><li>Fixed Income </li></ul></ul></ul><ul><ul><ul><li>Equities </li></ul></ul></ul><ul><ul><ul><li>Credit Risk (structuring, pricing, documentation, recoveries) </li></ul></ul></ul><ul><ul><ul><li>Credit Trading </li></ul></ul></ul><ul><ul><ul><li>Derivatives/Exotic Derivatives </li></ul></ul></ul><ul><ul><ul><li>Currencies/Commodities </li></ul></ul></ul><ul><ul><ul><li>Emerging Markets </li></ul></ul></ul>
    6. 6. Views from the Dark Side <ul><li>In moving to the Sell Side: </li></ul><ul><li>Is this appropriate? Is it sustainable? </li></ul><ul><li>Are the skills transferable? Are they sufficient? </li></ul><ul><li>Is the knowledge transferable? </li></ul><ul><li>What’s the big deal? </li></ul>
    7. 7. Views from the Dark Side <ul><li>The big deal? </li></ul><ul><ul><li>O </li></ul></ul><ul><ul><li>P </li></ul></ul><ul><ul><li>M </li></ul></ul>
    8. 8. Views from the Dark Side <ul><li>The big deal?: </li></ul><ul><li>Other </li></ul><ul><li>People’s </li></ul><ul><li>Money </li></ul>
    9. 9. Views from the Dark Side <ul><li>What do they want?: </li></ul><ul><ul><li>Performance </li></ul></ul><ul><ul><ul><li>Absolute </li></ul></ul></ul><ul><ul><ul><li>Relative </li></ul></ul></ul>
    10. 10. Views from the Dark Side <ul><li>Investment Management - the challenge: </li></ul><ul><ul><li>To deliver superior investment performance in a manner that is consistent with the mandate and/or expectations of our clients. </li></ul></ul>
    11. 11. Views from the Dark Side <ul><li>Investment Risk - the challenge: </li></ul><ul><ul><li>To design and implement an approach to investment risk management that adds value to the global investment management process </li></ul></ul>
    12. 12. Views from the Dark Side <ul><li>Global Investment Management Process: </li></ul>Macro research & asset allocation Micro research & stock/security selection Portfolio Construction Risk Management Performance Monitoring
    13. 13. Views from the Dark Side <ul><li>Investment Risk – how would you define it: </li></ul><ul><ul><li>As an investor: </li></ul></ul><ul><ul><ul><li>Investment Risk : the failure to deliver investment performance that is consistent with the mandate and/or expectations of our clients . </li></ul></ul></ul><ul><ul><ul><li>Unpleasant surprises </li></ul></ul></ul>
    14. 14. Views from the Dark Side <ul><li>Investment Risk – how would you define it: </li></ul><ul><ul><li>As a risk manager: </li></ul></ul><ul><ul><ul><li>Investment Risk : the measurement and assessment of exposure held by Invesco Global and its clients’ portfolios to expected and unexpected volatility in financial performance and the requirement to ensure that exposure to unexpected volatility is managed effectively and comprehensively at product level . </li></ul></ul></ul>
    15. 15. Views from the Dark Side <ul><li>Investment Risk – What are the Strategic Objectives?: </li></ul><ul><ul><li>Play an active, integral role in the firm’s global investment management process . </li></ul></ul>
    16. 16. Views from the Dark Side <ul><li>Global Investment Management Process: </li></ul>Buy List – Credit Risk Assessment Volatility Analysis “ What if…” Macro research & asset allocation Micro research & stock/security selection Portfolio Construction Risk Management Performance Monitoring
    17. 17. Views from the Dark Side <ul><li>Investment Risk – What are the Strategic Objectives?: </li></ul><ul><ul><li>Embed a strong, consistent risk culture within the firm’s global investment management process. </li></ul></ul><ul><ul><ul><li>Risk Culture relates to the behavior </li></ul></ul></ul><ul><ul><ul><ul><li>the proactive management of risk vs. reward. </li></ul></ul></ul></ul><ul><ul><ul><li>As we work to deliver superior investment performance, actions must be consistent with any client’s mandate and/or their needs. </li></ul></ul></ul>
    18. 18. Views from the Dark Side <ul><li>Investment Risk – What are the Strategic Objectives?: </li></ul><ul><ul><li>Define clearly and precisely the design and structure, roles and responsibilities, priorities and deliverables of Global Investment Risk. </li></ul></ul>
    19. 19. Views from the Dark Side <ul><li>Investment Risk – What are the Strategic Objectives?: </li></ul><ul><ul><li>Play an active role in the growth of the firm through participating in : </li></ul></ul><ul><ul><ul><li>investment performance communications, </li></ul></ul></ul><ul><ul><ul><li>client presentations, </li></ul></ul></ul><ul><ul><ul><li>new product development. </li></ul></ul></ul>
    20. 20. Views from the Dark Side <ul><li>Investment Risk – What is the end game? </li></ul><ul><ul><li>T o minimize the firm’s exposure to: </li></ul></ul><ul><ul><li>       Unexpected volatility of investment performance relative to mandate </li></ul></ul><ul><ul><li>       Persistence in investment underperformance </li></ul></ul><ul><ul><li>       Loss of client assets/Loss of growth in client assets </li></ul></ul><ul><ul><li>       Loss of revenue/Loss of growth in revenues </li></ul></ul><ul><ul><li>       Loss of capital </li></ul></ul>
    21. 21. Views from the Dark Side <ul><li>Do we design by risk type?: </li></ul><ul><ul><li>Specialist expertise by risk discipline: </li></ul></ul><ul><ul><ul><li>Market Risk </li></ul></ul></ul><ul><ul><ul><li>Credit Risk </li></ul></ul></ul><ul><ul><ul><li>Operational Risk </li></ul></ul></ul><ul><ul><ul><li>(maybe) Portfolio Management </li></ul></ul></ul><ul><ul><ul><li>Regulatory Issues/Basle II </li></ul></ul></ul>
    22. 22. Views from the Dark Side <ul><li>Do we design by specialisation?: </li></ul><ul><ul><li>Specialist expertise by asset class: </li></ul></ul><ul><ul><ul><li>Fixed Income </li></ul></ul></ul><ul><ul><ul><li>Equities </li></ul></ul></ul><ul><ul><ul><li>Credit Risk (structuring, pricing, documentation, recoveries) </li></ul></ul></ul><ul><ul><ul><li>Credit Trading </li></ul></ul></ul><ul><ul><ul><li>Derivatives/Exotic Derivatives </li></ul></ul></ul><ul><ul><ul><li>Currencies/Commodities </li></ul></ul></ul><ul><ul><ul><li>Emerging Markets </li></ul></ul></ul>
    23. 23. Views from the Dark Side <ul><li>The design: </li></ul>Portfolio Construction Investment Risk Policy (Minimum Standards) Contribution Attribution and Performance Assessment Product & Style Integrity Assessment Risk-adjusted Portfolio Analysis (Volatility Analysis; “ What if” a nalysis) Core Competencies Drive the Investment Risk Management process to the performance generating level of the organization across all products, including funds managed directly as well as those managed on an advisory basis. Exception Reporting Local RMC GRMC Global Risk-Adjusted Performance Analysis (GRaPA) Investment Risk Managers GMAC
    24. 24. Views from the Dark Side <ul><li>Contribution, Attribution and Performance Analysis </li></ul><ul><ul><li>Contribution – </li></ul></ul><ul><ul><ul><li>What factors contributed positively to absolute performance? </li></ul></ul></ul><ul><ul><ul><li>What factors contributed negatively to absolute performance? </li></ul></ul></ul><ul><ul><li>Attribution – </li></ul></ul><ul><ul><ul><li>What factors had a positive influence on relative performance? </li></ul></ul></ul><ul><ul><ul><li>What factors had a negative influence on relative performance? </li></ul></ul></ul><ul><ul><li>Performance – </li></ul></ul><ul><ul><ul><li>Ranking of Performance: </li></ul></ul></ul><ul><ul><ul><ul><li>Quartile </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Time </li></ul></ul></ul></ul>
    25. 25. Views from the Dark Side <ul><li>Product & Style Integrity Analysis </li></ul><ul><ul><li>Marketing Proposition is “Multi-Product/Multi-Style” </li></ul></ul><ul><ul><ul><li>What is defined in the Mandate or Product Specification? </li></ul></ul></ul><ul><ul><ul><li>Are we operating within the mandate? </li></ul></ul></ul><ul><ul><ul><li>No “wiggle room”! </li></ul></ul></ul>
    26. 26. Views from the Dark Side <ul><li>Risk-adjusted Portfolio Analysis </li></ul><ul><ul><li>Practical Application of Risk Specialisation </li></ul></ul><ul><ul><ul><li>Market Risk </li></ul></ul></ul><ul><ul><ul><ul><li>Value @ Risk / Assets @ Risk / Performance @ Risk </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Stress & Scenario Testing </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Simulation </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>“ What would be the impact on performance?” </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Credit Risk </li></ul></ul></ul><ul><ul><ul><ul><li>Expected Loss </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Loss Given Default </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Unexpected Loss </li></ul></ul></ul></ul>
    27. 27. Views from the Dark Side <ul><li>Risk-adjusted Portfolio Analysis (continued) </li></ul><ul><ul><li>Practical Application of Risk Specialisation </li></ul></ul><ul><ul><ul><li>Volatility Analysis </li></ul></ul></ul><ul><ul><ul><ul><li>Expected Volatility </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Unexpected Volatility </li></ul></ul></ul></ul>
    28. 28. Probability distribution of P&L's Probability Monthly Performance (%) + - 0 5% chance of unexpected loss 5% chance of unexpected gain +3.0% -1 . 5 %
    29. 29. Risk-Return -5% 5% 15% 25% 35% 45% 0% 20% 40% 60% 80% 100% 120% 140% Risk (% Equity) Mean Return (% Equity)
    30. 30. Risk Appetite and Unexpected Volatility Risk (% Equity) Mean Return (% Equity)
    31. 31. Risk Adjusted Performance Measurement EL 99 % Base Probability Density Loss £m Base Case
    32. 32. Risk Adjusted Performance Measurement  EL  99 % Base New Profile Probability Density Loss £m Adjusted Profile
    33. 33. Views from the Dark Side <ul><li>Investment Risk - the challenge: </li></ul><ul><ul><li>To design and implement an approach to investment risk management that adds value to the global investment management process </li></ul></ul>
    34. 34. Views from the Dark Side <ul><li>Investment Management - the challenge: </li></ul><ul><ul><li>To deliver superior investment performance in a manner that is consistent with the mandate and/or expectations of our clients. </li></ul></ul>
    35. 35. Views from the Dark Side <ul><li>At Invesco: </li></ul><ul><ul><li>“ All we do is invest” </li></ul></ul>
    36. 36. Views from the Dark Side Bill Martin - Global Head of Investment Risk GARP Risk Forum 19 December 2001
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