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Views from the Dark Side Bill Martin - Global Head of Investment RiskGARP/ISDA Risk Forum19 December 2001
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2INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
The Dark Side refers to the “Buy” side
– Investment Management
– Asset Management
– Fund Management
Why “the Dark Side”?
– ”Accept the power of the Dark Side”• Darth Vader to Luke Skywalker – Star Wars
IV
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3INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Traditionally, the leaders of “risk management” have come from the “Sell” Side of
investment banks– Mark-to-Market
followed by commercial banks,– Traditional credit expertise
followed by consultants,
advisors,
academics,
rocket scientists,
IT propeller heads,
We created an Industry!
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4INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
What would one expect from a “Sell Side” risk manager:
– Specialist expertise by risk discipline:• Market Risk
• Credit Risk
• Operational Risk
• (maybe) Portfolio Management
• Regulatory Issues/Basle II
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5INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
What would one expect from a “Sell Side” risk manager:
– Specialist expertise by asset class:• Fixed Income
• Equities
• Credit Risk (structuring, pricing, documentation, recoveries)
• Credit Trading
• Derivatives/Exotic Derivatives
• Currencies/Commodities
• Emerging Markets
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6INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
In moving to the Sell Side:
Is this appropriate? Is it sustainable?
Are the skills transferable? Are they sufficient?
Is the knowledge transferable?
What’s the big deal?
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7INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
The big deal?
O
P
M
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8INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
The big deal?:
Other
People’s
Money
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9INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
What do they want?:
– Performance
• Absolute
• Relative
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10INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Investment Management - the challenge:
– To deliver superior investment performance in a manner that is consistent with the mandate and/or expectations of our clients.
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11INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Investment Risk - the challenge:
– To design and implement an approach to investment risk management that adds value to the global investment management process
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12INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Global Investment Management Process:
Macro research & asset
allocation
Micro research & stock/security
selection
Portfolio Construction
Risk Management
Performance Monitoring
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13INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Investment Risk – how would you define it:
– As an investor:
• Investment Risk: the failure to deliver investment performance that is consistent with the mandate and/or expectations of our clients.
• Unpleasant surprises
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14INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Investment Risk – how would you define it:
– As a risk manager:
• 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.
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15INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Investment Risk – What are the Strategic Objectives?:
– Play an active, integral role in the firm’s global investment management process.
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16INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Global Investment Management Process:
Macro research & asset
allocation
Micro research & stock/security
selection
Portfolio Construction
Risk Management
Performance Monitoring
Buy List – Credit Risk Assessment
Volatility Analysis
“What if…”
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17INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Investment Risk – What are the Strategic Objectives?:
– Embed a strong, consistent risk culture within the firm’s global investment management process.
• Risk Culture relates to the behavior
– the proactive management of risk vs. reward.
• As we work to deliver superior investment performance, actions must be consistent with any client’s mandate and/or their needs.
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18INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Investment Risk – What are the Strategic Objectives?:
– Define clearly and precisely the design and structure, roles and responsibilities, priorities and deliverables of Global Investment Risk.
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19INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Investment Risk – What are the Strategic Objectives?:
– Play an active role in the growth of the firm through participating in:
• investment performance communications,
• client presentations,
• new product development.
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20INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Investment Risk – What is the end game?
– To minimize the firm’s exposure to:
Unexpected volatility of investment performance relative to
mandate
Persistence in investment underperformance
Loss of client assets/Loss of growth in client assets
Loss of revenue/Loss of growth in revenues
Loss of capital
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21INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Do we design by risk type?:
– Specialist expertise by risk discipline:• Market Risk
• Credit Risk
• Operational Risk
• (maybe) Portfolio Management
• Regulatory Issues/Basle II
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22INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Do we design by specialisation?:
– Specialist expertise by asset class:• Fixed Income
• Equities
• Credit Risk (structuring, pricing, documentation, recoveries)
• Credit Trading
• Derivatives/Exotic Derivatives
• Currencies/Commodities
• Emerging Markets
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23INVESCO Asset Management Limited - Regulated by IMRO
Portfolio Construction
Views from the Dark Side
The design:
Investment Risk Policy (Minimum Standards)
Contribution Attribution and Performance Assessment
Product & Style Integrity Assessment
Risk-adjusted Portfolio Analysis (Volatility Analysis; “What if” analysis)
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.
ExceptionReporting
Local RMC
GRMCGlobal Risk-Adjusted Performance Analysis (GRaPA)
Investment Risk Managers
GMAC
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24INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Contribution, Attribution and Performance Analysis
– Contribution – • What factors contributed positively to absolute performance?
• What factors contributed negatively to absolute performance?
– Attribution – • What factors had a positive influence on relative
performance?
• What factors had a negative influence on relative performance?
– Performance –
• Ranking of Performance:
– Quartile
– Time
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25INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Product & Style Integrity Analysis
– Marketing Proposition is “Multi-Product/Multi-Style”
• What is defined in the Mandate or Product Specification?
• Are we operating within the mandate?
• No “wiggle room”!
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26INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Risk-adjusted Portfolio Analysis– Practical Application of Risk Specialisation
• Market Risk
– Value @ Risk / Assets @ Risk / Performance @ Risk
– Stress & Scenario Testing
– Simulation
» “What would be the impact on performance?”
• Credit Risk
– Expected Loss
» Loss Given Default
– Unexpected Loss
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27INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Risk-adjusted Portfolio Analysis (continued)
– Practical Application of Risk Specialisation
• Volatility Analysis
– Expected Volatility
– Unexpected Volatility
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28INVESCO Asset Management Limited - Regulated by IMRO
Probability distribution of P&L'sP
rob
abil
ity
Monthly Performance (%)
+- 0
5% chance of unexpected loss
-1.5%
5% chance of unexpected gain
+3.0%
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INVESCO Asset Management Limited - Regulated by IMRO
Risk-Return
-5%
5%15
%25
%35
%45
%
0% 20% 40% 60% 80% 100% 120% 140%
Risk (% Equity)
Mea
n R
etur
n (%
Equ
ity)
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30INVESCO Asset Management Limited - Regulated by IMRO
Risk Appetite and Unexpected Volatility
-50%-45%-40%-35%-30%-25%-20%-15%-10%-5%0%5%
10%15%20%25%30%35%40%45%50%55%60%
Risk (% Equity)
Mea
n R
etur
n (%
Equ
ity)
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31INVESCO Asset Management Limited - Regulated by IMRO
Risk Adjusted Performance Measurement
ELEL 99 %99 %
BaseBase
Pro
bab
ilit
y D
ensi
tyP
rob
abil
ity
Den
sity
Loss Loss £m £m
Base CaseBase Case
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32INVESCO Asset Management Limited - Regulated by IMRO
EELL
99 %99 %
BaseBase
New New ProfileProfile
Pro
bab
ilit
y D
ensi
tyP
rob
abil
ity
Den
sity
Loss Loss £m £m
Risk Adjusted Performance Measurement
Adjusted ProfileAdjusted Profile
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33INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Investment Risk - the challenge:
– To design and implement an approach to investment risk management that adds value to the global investment management process
![Page 34: - Presentation slides by Bill Martin - 19 Dec 01](https://reader035.fdocuments.in/reader035/viewer/2022062417/54b4d05a4a7959bd488b47d6/html5/thumbnails/34.jpg)
34INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
Investment Management - the challenge:
– To deliver superior investment performance in a manner that is consistent with the mandate and/or expectations of our clients.
![Page 35: - Presentation slides by Bill Martin - 19 Dec 01](https://reader035.fdocuments.in/reader035/viewer/2022062417/54b4d05a4a7959bd488b47d6/html5/thumbnails/35.jpg)
35INVESCO Asset Management Limited - Regulated by IMRO
Views from the Dark Side
At Invesco:
“All we do is invest”
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Views from the Dark Side Bill Martin - Global Head of Investment RiskGARP Risk Forum19 December 2001