Risk-adjusted performance measurement requires intellectual firepower

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With so much volatility going on in the region, and in fact, in the world, investors are doubly cautious in the choice of investments they make. In assessing risk, what are the factors that need to be …

With so much volatility going on in the region, and in fact, in the world, investors are doubly cautious in the choice of investments they make. In assessing risk, what are the factors that need to be considered before making any investment decision? In the age of technology and volumes of data, where does ‘intellect’ fit in?

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  • 1. Risk-adjustedperformancemeasurementrequires‘intellectualfirepower’by Darwin Jayson Mariano I n dealing with risk-adjusted performance or risk- adjusted return, there are five principal riskWith so much volatility going on in the region, measures to consider: alpha, beta, r-squared,and in fact, in the world, investors are standard deviation and the Sharpe ratio. Eachdoubly cautious in the choice of investments risk measure is unique in how it measures risk.they make. Will it be in stocks or bonds? In comparing two or more potential investments, an investor should always compare the same riskCould be both. What percentage goes to each measures to each different investment in order tobasket and how much yield one expects to get get a relative performance perspective.*are now based on a whole host of factors,primary of which is measuring return by In our interview with Madhu Gayer, Head of Invest- ment Reporting and Performance - Asia Pacifictaking into account the risks involved in for BNP Paribas Securities Services, he identifiedproducing that return – what we call, the main challenges in risk adjusted performancerisk-adjusted performance measurement. measurement and according to him this can be summed up in three significant factors – data, methodologies and people.
  • 2. “ The question we need to ask is O f the three factors described above, perhaps the most important and most critical factor is do people dealing with risk- people. In our interview with Madhu Gayer, adjusted performance measure- he weighed in on this: “I think it all comes down to ment have the intellectual fire- people. The question we need to ask is do people dealing with risk-adjusted performance measure- power, the training, the world ex- “ ment have the intellectual firepower, the training, perience to convert the numbers the world experience to convert the numbers into meaningful information for boards, trustees, asset into meaningful information. managers and CEOs to act upon. - Madhu Gayer, BNP Paribas Securities Services In his current role, (Editor’s note: Madhu Gayer is a newly appointed APAC head of investment report- ing and performance for BNP Paribas Securities Services), Madhu spoke about his own challenges. DATA When thinking about risk- “The challenges that I’m seeing my clients face are adjusted performance and more on the region of how to cope with the systems, risk-adjusted returns, suddenly you how to cope with the data and how to cope with thehave to think a lot more about the data elements reporting as well. Where do they get the informationand where the systems are actually built in order from, how do they present it, and how do peopleto cope with the enormous needs. The influx of actually make use of the numbers so that they candata that comes from multiple sources could be get informed decisions out of the numbers.”massive and adequate systems must be put inplace to be able to crunch these numbers and get Reeling from the aftermath of the global recessionmeaningful information out of it. caused by, some would argue, wanton disregard of risks in making billions of dollars of investments, in- vestors these days would better be served if a per- fect balance of risk and return would be achieved through a great deal of intellect. METHODOLOGIES Different organizations have Hear more from Madhu Gayer as he speaks about different methodologies and there’s Overcoming key challenges in risk adjusted performance at the Investment Performance and Risk Management no single best method that can be (IPARM) Asia 2013. applied across all organizations.Moreover, there’s always new methodologies, new To attend the conference, send an email torisk statistics coming up all the time. The important enquiry@iqpc.com.sg or call +65 6722 9388. You can download the event brochure here.thing is that one must have an established set ofpractices and standards to follow in order to makethe whole process smooth and efficient. About IPARM Asia 2013: The Investment Performance and Risk Management (IPARM) Asia 2013 conference is the ONLY gathering of investment risk and performance professionals in Asia. This year’s theme: Utilise best performance measurement, attribution and risk- PEOPLE management practices to maximise your portfolio return. Our 2013 Distinguished Speakers include top executives from Typically, you can categorize this BlackRock Asset Management, BNP Paribas Securities Services, group as either performance people AXA Investment Managers Asia, Aberdeen Asset Management, BNY Mellon Asset Management, among others. or risk people. Whatever group they belong, what’s important is forthese people to have the right mastery of the data, About the Author: Darwin Jayson Mariano is an Online Content Strategist and thetools, methods that are available to them and use Regional Editor - Asia for International Quality & Productivityit to further the interests of every Center (IQPC). You can contact him on Twitter @whoisdarwin orstakeholder involved. email darwin.mariano@iqpc.com.sg *http://www.investopedia.com/terms/r/riskadjustedreturn.p#axzz2DTrtW8jf