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Managing Investment Risk


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In collaboration with GMT Capital, Clement Ashley Consulting recently held a nation-wide capital market investors conference in ten cities. This is the slideshow of the presentation I made at the conference.

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Managing Investment Risk

  2. 2. Investment Types Fixed Income securities T. Bills BA’s C.Bills Bonds Equities Quoted Unquoted Derivatives Options, Swaps, Forwards Real Estate Property, REIT’s, Mortgages FX Investors Conference 2008 2
  3. 3. Investment Risks Bonds Credit risk Property Fixed Income Investments Concentration risk Bonds All assets Mortgages etc Inflation risk Liquidity risk Fixed Income Investments Property Bonds Equities Interest Rate risk Unquoted Implied in FII, Bonds et al Quoted Market risk Devaluation All local currency assets Equities Regulatory risks Quoted Unquoted NPC, Tax, Accounting Investors Conference 2008 3
  4. 4. Investment Policy Statements An investment policy is the blueprint for the prudent and effective management of your investment associated with a given risk appetite. An effective investment policy underscores the link between the investments (assets) and the risk tolerance and return expectations of the investor. Investors Conference 2008 4
  5. 5. Contents of the Investment Policy The objectives of the investment A description of the sources of funds and any constraints Risk tolerance of the investor, organization or (members) Liquidity/marketability requirements Asset allocation mix targets and ranges Portfolio Management guidelines and limits structure Performance goals and evaluation criteria Accounting, regulatory and tax rules applicable Procedures and Authorities Investors Conference 2008 5
  6. 6. Asset allocation mix targets and ranges The items preceding asset mix in the slide above more or less dictate what asset mix targets should be set. Individual targets need to be set for the following Liquidity (based on purpose) Contribution or mix of assets Tenor for asset classes Matching measures based on ALM techniques adopted Credit risk (incl. required diversification) Investors Conference 2008 6
  7. 7. Asset allocation mix targets and ranges (cont’d) The accounting method on which the targets are set should be clear The end result is a portfolio policy which could represent A long term asset mix for the portfolio A risk free or risk minimizing portfolio A basis for analyzing the investment manager’s performance Investors Conference 2008 7
  8. 8. RISK MANAGEMENT TOOLS RISK MGT. TOOL INVESTMENT RISK Credit ratings and limits Credit risk Fixed Income Investments Bonds Mortgages etc Liquidity risk Tenor limits Property Equity Investment limits by Market risk asset type, sector, Equities industry, margin able Bonds limits, stop loss limits Property and 4 triggers Investors Conference 2008 8
  9. 9. RISK MANAGEMENT TOOLS cont'd INVESTMENT RISK RISK MGT. TOOL Concentration risk Diversification All assets Inflation risk Cap. Appr. Products Fixed Income Investments Bonds Derivatives Interest Rate risk Implied in FII, Bonds et al FX denominated products Devaluation All local currency assets Regulatory risks Compliance procedures and limits NPC, Tax, Accounting Investors Conference 2008 9
  10. 10. Asset mix to suit risk appetite ASSET MIX SAMPLE PLANS Property LTFII Redundancy STFII Gratuity Savings Equity NPC PLAN TYPE Investors Conference 2008 10
  11. 11. RISK MGT. REPORTS Cashflow statement Portfolio distribution by type, industry or sector compared with target asset mix Portfolio return by type compared with benchmark Portfolio credit risk profile compared with target Risk return ratio vs benchmark Excess over limits exception report Real return (inflation adjusted) reports Investors Conference 2008 11 Et al
  12. 12. MARKET INFORMATION Analysts Stock Service (daily) Economic watch Companies and markets Daily stock update and stock market indicators Capital market Investors Conference 2008 12
  13. 13. ALM Techniques Cash-Flow Matching Duration (Tenor) matching Scenario Testing Others evolving Investors Conference 2008 13
  14. 14. Q&A Investors Conference 2008 14
  15. 15. Thank You The End Investors Conference 2008 15