The growing complexity of risk management is the biggest challenge facing institutional investors globally, a new survey has found – a trend the New Zealand market is following closely.
According to the BNP Paribas survey of 177 global asset owners (including two in NZ), close to 60 per cent of respondents rated the increasingly complex nature of risk management as a major challenge to their organisations.
Doug Cameron, head of BNP Paribas NZ, said the report “documents some of the trends that we are seeing develop in New Zealand as well as some that we may see in the future”.
Cameron said the growth of KiwiSaver combined with increased regulation, such as the Financial Markets Conduct Act, would push NZ further in line with global risk management practices.
“An example of this is the inclusion of such techniques as stress testing and liquidity risk analysis as minimum criteria for investment managers when applying for their MIS [Managed Investment Scheme] licence,” he said.
However, the BNP report, ‘Risk analytics – challenges and perspectives in a low yield environment’, says in spite the “explicit focus on risk from regulators”, complexity concerns far outweighed respondent worries about the cost of compliance.
“This suggests that for asset owners the major era of implementing new regulation is behind them,” the survey says. “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.”
While the NZ investment industry may not have yet reached this advanced, cost-indifferent phase, Cameron said it is still dealing with similar risk management challenges to the rest of the world.
A localised version of the BNP survey found respondents were relatively comfortable with counterparty, investment, product, IT and key person risks. About 20 per cent of those surveyed rated economic uncertainty as a risk to their businesses.
“Overall, senior management is kept awake by a wide range of risk management issues, ranging from time spent on risk management (32%), to finding the best risk-adjusted returns (26%) while data management, managing volatility and meeting regulation each worrying 21% of respondents,” Cameron said.
“Interestingly, managing liquidity, currency and collateral risks ranked low.”
The regional results differ somewhat from the global survey that found liquidity risk analysis “a major focus for asset owners across segments”.
That result “could reflect the prolonged low interest rate environment and heightened awareness of liquidity risk post the financial crisis”, the report says.
Despite the current low-yield environment, the overwhelming majority of respondents (60 per cent) said they would seek to enhance returns from existing investments – for example, by way of securities lending – rather than pursue riskier strategies.
Just over 20 per cent of those surveyed said they would take on active strategies or seek new, or increased, exposure to emerging markets. Only 9 per cent indicated they would ramp up allocations to alternative investments.
While the survey found most asset owners are confident of their ability to manage risks – using techniques such as stress testing, liquidity analysis and value at risk models – increasing complexity would test existing approaches.
“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,” the report says.
The survey says asset owners are likely to seek risk analytical solutions – probably via a mix of in-house and out-sourced – that provide a coordinated view of multiple risks.
“In our view, the next phase of risk management is one where providers will differentiate themselves further by developing consolidation tools for asset owners,” the BNP report says.
