2013 Callan Risk Management Survey

8/17/2019 2013 Callan Risk Management Survey

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2013 Risk Management Survey

Risk Management in a New Light

CALLAN

INVESTMENTS

INSTITUTE

Survey


2/24


3/24

2013 Risk Management Survey 1Knowledge. Experience. Integrity.

Table of Contents

Executive Summary 2

Respondent Characteristics 3

Are Risk Management Tools Effective? 4

External Inuences 5

Reactions to the 2008 Market Crisis 6

Policy-Level Considerations 7

Strategy-Level Considerations 8

Formally Addressing Risk Management 9Risk Management Stafng 12

Consultants 13

Risk Measurement 14

Risk Management Reports 17

Reviewing and Communicating Risk Management Findings 18

Taking Action 19

Risk-Based Tactical Moves 20


4/24


The 2008 market crisis put risk in the spotlight and prompted fund duciaries to look at risk management in a new light. Callan

elded this survey in November 2012, and the results incorporate responses from 53 fund sponsors representing $576 billion

in assets. The vast majority of this group has taken concrete steps in the past ve years to address investment risks. More

than half (55%) believe their risk management tools are effective at mitigating investment risk, but 14% see these systems as

simply a means to improve risk identication and monitoring. The jury is still out for one-third of respondents, as their tools are

relatively new and untested in a true market crisis. Other key ndings of our survey include:

• Public and corporate funds are embracing policy-level approaches to risk management more so than endowments/

foundations. Public funds have implemented economic regime asset allocations, risk parity, and risk factor-based asset

allocation, while corporate funds favor liability-driven investing and funded status-based glide path de-risking.

• Strategy-level approaches to mitigate risk are easier to implement than those that alter the fund’s overall investment

policy, and we observed higher levels of adoption for strategy changes across fund types. Public funds and endowments/

foundations are most heavily implementing or considering real assets, opportunistic xed income, absolute return, and

long/short equity. Corporate funds are also embracing absolute return, but long duration is the most favored strategy-level

approach used to address risk.

• Most funds (94%) do not have a formal risk budget, but rather explicitly address risk management in their plan governance

via asset allocation, investment objectives, and disciplined rebalancing.

• Formal risk management processes are most prevalent at large funds, although around half of medium and small funds have

adopted one or are considering doing so this year. Funds implementing a formal risk management process generally aim to

gain a better understanding of the risks taken, monitor them, and document them.

• Forty-two percent of all respondents employ proprietary and/or third-party risk measurement tools, such as software or

data services. Usage of third-party tools is most prevalent at public funds, while endowments/foundations are the greatest

adopters of in-house (proprietary) tools.

• The investment committee is the body most regularly tasked with deciding when to take action based on the ndings of risk

management tools. The most common actions taken were asset allocation changes (64% of respondents), manager due

diligence/search (56%), and increased manager monitoring (52%). A full 20% of respondents had not yet taken any actions

based on risk management ndings.

• Many fund sponsors wrestle with whether or not to tactically manage plan risk. Only 30% of sponsors have made

rebalancing decisions (including but not limited to tactical rebalancing) based on risk management ndings. Of those that

have not done so, most (82%) do not plan to in the future. Public (31%) and large (25%) funds are most likely to use tactical

implementations going forward.

Executive Summary


5/24


Callan conducted the Risk Management survey in Novem-

ber 2012. Results incorporate responses from 53 fund spon-

sor organizations representing $576 billion in assets (as of

June 30, 2012). Of those that measure funded status (79%

of respondents), the average funded status was 75% within

a range of 28% to 100%. More than one-third of respondents

(37%) were Callan clients at the time they responded.

The majority of respondents (51%) are public funds, and cor-

porate funds make up 21%. The remaining respondents are

endowments/foundations (17%), Taft-Hartley plans (5%), or

other types of organizations (including charitable trusts and

other types of tax-exempt plans).

The respondent pool is split by fund size into roughly three

parts: small funds (less than $1 billion in assets) make up

30%, medium funds (between $1 and $5 billion) make up

32%, and the remaining 38% are large funds (greater than

$5 billion).

Respondent Characteristics

Respondents by Fund Type

Respondents by Fund Size

Public51%

Corporate21%

Other 6%

Endowment/Foundation 17%

Taft-Hartley 5%

>$15 billion 21%


6/24


More than half of fund sponsors (55%) feel that risk manage-

ment tools and systems have had a positive overall impact

on their fund. One-third of respondents are unsure how ef-

fective these tools are, but will be able to better assess these

systems after they have been tested in a future market crisis.

Fourteen percent of asset owners do not see these tools as

effective.

Yes

• “It has changed the staff, investment committee, and board focus from alpha to asset allocation. Thus, we have been able

to build a more balanced portfolio together over the past year.”

• “It allows us to look at the portfolio from a number of different ways that we haven’t considered in the past.”

• “The fund is more diversied and has increased hedges.”

No (or Not Yet)

• “We have not yet used them to their fullest extent. We are continuing to learn how these can benet managing our

investments.”

• “Not really. We monitor risk, but do not manage it. The only formal risk management we do is in our strategic asset

allocation and rebalancing to targets.”

• “Not used to mitigate risk—mostly to identify and understand sources of risk. Used more for monitoring than mitigation

to date.”

Note: Throughout this survey, charts may not sum to 100% due to rounding.

Are Risk Management Tools Effective?

Have risk management tools/systems been effective atmitigating your fund’s investment risk?

Select survey respondent quotes:

Yes 55%

No

14%

Unsure/

too soon

to know

32%


7/24


Over the past decade, asset owners have begun to intensely

focus on risk while taking a step back from “reaching for re-

turns.” External factors have certainly played a role in shap-

ing how investors view risk. We asked respondents to score

the degree to which various factors have inuenced their

organizations.

Asset/liability considerations top fund sponsors’ list of inu-

encing factors, which is not surprising given the plunging

funded ratios witnessed in the recent past. Future market

outlook and recent market events rank second and third,

revealing enduring uncertainties stemming from the 2008

nancial crisis.

Liquidity/cash ow concerns rank fourth. Many funds faced

unexpectedly large drawdowns despite their highly diversi-

ed allocations, alongside signicant liquidity and rebalanc-

ing issues caused in part by their large, ill iquid private market

programs. Peer inuence registers low on the scale.

External Inuences

What external factors have inuenced how yourorganization addresses risk management?

0 1 2 3 4 5

Actions/results of peer funds

Other regulatory/political issues

Stakeholder/public scrutiny

Projected future inflation

Liquidity/cash flow concerns

Recent market events(e.g., increased volatility, effectiveness of diversification, etc.)

Future market outlook(e.g., low returns, high volatility, etc.)

Asset/liability considerations(e.g., funded status volatility, contribution volatility, etc.)

2.1

3.3

3.0

2.7

2.4

2.2

3.5

1.8

Weighted Average Score (0=Least Important, 5=Most Important)


8/24


The 2008 market crisis caused asset owners substantial

stress, and continues to impact decision making. Signicant

changes are occurring at many fund sponsor organizations,

frequently driven by a renewed focus on risk. The majority of

fund sponsors (81%) reveal increased concern about invest-

ment risk at their organization following the market crisis.

The focus on risk has impacted both the types of investments

asset owners consider and the entire structure of their in-

vestment policy. Sixty-two percent report that their strategic

asset allocation changed; 47% of respondents signicantly

increased allocations to alternatives, which can offer diversi-

cation benets relative to traditional asset classes. Approxi-

mately half of respondents lowered their return target.

Just one respondent indicated no changes have occurred

since 2008.

Reactions to the 2008 Market Crisis

What changes have occurred at your organization since the 2008 market crisis?

0% 20% 40% 60% 80% 100%

No changes

Adoption of explicit risk target

Other

Investment time horizon shortened

More tactical in asset allocation(defensive to lower risk)

Changed rebalancing policies(increased flexibility)

Appetite for return and the necessaryrisk to achieve it declined

Increased resources (people, tools, budgets, etc.)in risk measurement and management

Risk focus changed from asset tofunded status volatility

More opportunistic in asset allocation(aggressive to increase return)

Significantly increased allocation to alternatives(increased diversification)

Return target declined

Strategic asset allocation changed

Concern about investment risk increased

21%

2%

4%

8%

11%

21%

28%

26%

25%

32%

47%

51%

62%

81%


9/24


To assess how discussions and actions around policy-level

approaches—or those that impact the entire fund struc-

ture—are developing, we asked respondents to indicate

their organization’s status across six different strategies.

Stages range across a spectrum, from Education (rst

stage) to Implemented. It is implied that those that selected

an advanced stage had already completed all the previ-

ous stages, and might have ended there. Alternately, some

funds at earlier stages may still be considering moves to

more advanced stages.

We dissect responses by fund type, as clear differences

arise in approaches between publics, corporates, and en-

dowments/foundations. For example, 73% of corporatefunds have considered risk factor-based asset allocation;

9% of those made it all the way to implementation while 36%

pursued education but had taken no further action as of the

survey response date.

Risk parity appears to have gained the most traction with

public funds at the policy level. However, the 75% gure may

be articially high due to respondents mistakenly noting it

here when they in fact implemented this approach at the

strategy level (as detailed on the following page).

Around one-fth of public funds have implemented risk factor-

based asset allocation, while another one-third or more have

had staff consider the policy, but have taken no further action.

Policy-Level Considerations by Fund Type

Indicate which policy-level, “risk-centric” approaches you have considered orimplemented in your investment program.

0% 25% 50% 75% 100%

Funded status-basedde-risking glide path

LDI

Tail risk hedging

Economic regimeasset allocations

Risk parity

Risk factor-basedasset allocation

0% 25% 50% 75% 100%0% 25% 50% 75% 100%

Education Staff Consideration Presented to Committee Board Approved Implemented

CorporateEndowment/FoundationPublic

Note: All bars do not sum to 100% as respondents could also select “N/A” or “Unsure”.

64%

73%

73%18% 18% 9% 27%

27%

27% 27% 9%

45% 18%

36% 27%

36% 27% 9%

55%9%9%

64%

100%

64%

56%

67%

11%

22% 11%

11% 44%

22% 33%

44% 11%

11%

11% 44% 11%

67%

33%

56%

75%

71%

42%17%17%

13% 29%

17% 29% 17%

33% 8% 25%

13% 33%

4%4%

4%4% 4%

4%

8% 21%

38% 21%

67%

42%

67%


10/24


To assess how discussions and actions around strategy-

level approaches—or the adoption of individual strategies

within the fund’s existing structure—were developing, we

asked respondents to indicate their organization’s status

across 11 different approaches. Stages range across a

spectrum, from Education (rst stage) to Implemented. It

is implied that those that selected an advanced stage had

already completed all the previous stages, and might have

ended there. Alternately, some funds at earlier stages may

still be considering moves to more advanced stages.

We dissect responses by fund type, revealing substantial

differences between publics, corporates, and endowments/

foundations. For example, long duration is on the radar formore than 90% of corporate funds, likely as part of discus-

sions around LDI, and 73% have implemented a long dura-

tion strategy. Conversely, less than half of public funds and

endowments/foundations have considered this approach

and only around 10% have implemented it.

Approaches that generate return while adding to portfolio di-

versication have gained the most traction with public funds

and endowments/foundations, including opportunistic xed

income, absolute return, long/short equity, and real assets.

Strategy-Level Considerations by Fund Type

Indicate which strategy-level, “risk-centric” approaches you have considered orimplemented in your investment program

0% 25% 50% 75% 100%

56%

56%

67%

67%

78%

89%

100%

56%

44%

56%

67%

Education Staff Consideration Presented to Committee Board Approved Implemented

55%

45%

55%

64%

73%

64%

73%

45%

18%

27%

27% 27%

27%

27%

27%

27%

45%

36%

36%

36%

36%

73%

18%

18%

18% 18%

9%9%

9%9%

9%

9%

9%

9%

9%

91%

36%

27%

CorporateEndowment/Foundation

Note: All bars do not sum to 100% as respondents could also select “N/A” or “Unsure”.

0% 25% 50% 75% 100%0% 25% 50% 75% 100%

Yield equity

Short duration/floatingrate fixed income

Currency hedging

Long duration

Risk parity

Risk factor strategies

Low volatility equity

Opportunistic fixedincome

Absolute return

Long/short equity

Real assets

11%

11%11%11%

11%11%

11%

11%

11%

11%

11%

11%

44%

44%

44%

56%

56%

56%

56%

33%

33%

22%

22%

22%

22%

22%

22% 22%

22%

54%

58%

63%

83%

75%

79%

88%

54%

38%

50%

63%

Public

8% 33%

29%

29%

8%

4% 4%

4%

8%4%

4%

4%

4%

4%

8%

8%

8%

8%

8%

8%8%

8%

8%

17%

17%

17% 21%

33%

42%

38%

33%

38%

46%

17%

17%

17%

13%

13%

13%

13%

13%

13%

13%

17%


11/24


Risk management is interwoven with plan governance. We

assessed the popularity of more than a dozen options for ex-

plicitly addressing risk in plan governance, and found three

methods that are used by at least 50% of all fund types:

1. Strategic asset allocation,

2. Investment objectives, and

3. Disciplined rebalancing.

Performance and risk monitoring, liquidity needs, and peer

comparisons all registered highly for public funds, and to a

lesser degree for endowments/foundations and corporate

funds.

Other tactics, such as asset/liability matching targets, wereclearly popular with corporate funds (64%) but not with other

fund types. Conversely, only public funds have adopted ex-

plicit risk budgeting, and traction is low even within this group.

Similarly, the majority (94%) of respondents do not have a for-

malized risk budget.

Formally Addressing Risk Management

How is risk management explicitlyaddressed in plan governance?

Does your organization have aformal risk budget?

0% 25% 50% 75% 100%

Risk budgeting

Valuation methodology

Regulatory constraints

Leverage of fundand investments

Use/monitoringof derivatives

Asset/liabilitymatching targets

Counterparty risk

Funded status/spending targets

Peer comparisons(asset allocation, risk, return)

Liquidity needs

Performance and riskmonitoring for

all levels of fund

Disciplined rebalancing

Investment objectives(performance and risk)

Asset allocation/diversification 73%

96%89%

64%

79%89%

64%

36%

71%67%

75%44%

9%

71%

56%

56%

18%

25%

71%

45%44%

9%44%

42%

64%

17%

18%29%

11%8%

9%

21%

0%

0%0%

44%25%

33%

0%

0%

29%11%

Public Endowment/Foundation Corporate Yes 6%

No 94%


12/24


While the vast majority of funds do not formally budget risk,

more than one quarter (27%) have a formal risk management

process in place that extends beyond strategic asset alloca-

tion and rebalancing. Interestingly, an additional 31% are con-

sidering implementing one in 2013.

Large funds are best equipped to implement a formal risk

management process given the resources this entails. Ac-

cordingly, a greater percentage of large funds have already

implemented a formal risk management process (33%) than

medium or small funds (25%), and another 44% of large funds

are considering doing so in 2013.

Results vary less by fund type than by fund size. Endow-ments/foundations are least likely to implement or consider a

risk management process.

For organizations that have a formal risk management pro-

cess, understanding and documenting risks is the top prior-

ity. Other goals that rank highly indicate a focus on improv-

ing traditional duciary management practices. For example,

“changing the mix of necessary and reasonable risks” and

“lowering medium- to long-term total risk” are goals that are

incorporated into most prudent, long-term asset allocations.

Conversely, two goals that reect more tactical thinking reg-

istered on the low end of the scale. Hedging specic risks

and lowering short-term, downside risk are less traditional

approaches that are typically more aggressive with a short-

term focus. Few survey respondents prioritize these goals,

as would be expected within a long-term, strategic asset al-

location structure.

Formally Addressing Risk Management (continued)

What formal risk management process goals are most important to your organization?

0 1 2 3 4 5

Tactically lower short-term, downside risk

Specifically hedge certain risks(e.g., inflation, tail risk)

Lower/minimize medium-to long-term total risk

Change mix of necessaryand reasonable risks

Improve the risk/return trade-off

Lower funded status volatility

Better understand riskstaken and document them

3.0

2.9

2.8

2.8

2.5

3.4

2.4

Weighted Average Score (0=Least Important, 5=Most Important)

Does your organization have a formal risk management process?

Yes No, but considering for 2013 No,not considering for 2013

0% 20% 40% 60% 80% 100%

Corporate

Endowment/Foundation

Public

Small

Medium

Large

All 27% 31% 41%

50%25%25%

33% 44% 22%

56%19%25%

22% 33% 44%

36%36%28%

27% 36% 36%


13/24


Bottom up 21%

Risk Measured

Both

43%

Top down

36%

Bottom up 0%

Both

57%

Top down

43%

Risk Managed

Risk Measured

Both

50%

Relative risk(tracking error) 7%

Relative risk(tracking error)

29%

Both

43%

Absoluterisk(volatility)

50%

Absolute risk(volatility)

21%

Risk Managed

0% 20% 40% 60% 80% 100%

Yes36%

No64%

0% 20% 40% 60% 80% 100%

Yes29%

No71%

For organizations that have a formal risk management pro-

cess, approaches to risk management are split between

managing risk from both top down and bottom up (57%) and

from top down exclusively (43%). Risk measurement tactics

are more varied, with more than one-fth (21%) that mea-

sure risk from the bottom up exclusively. A combination of

both methods is the most popular means of measuring risk,

as well, at 43%.

Comparing absolute and relative risk, absolute risk appears

to be the priority, with 50% of respondents relying solely on

this measure to manage risk, and another 43% including it

alongside relative risk. The tables turn when it comes to risk

measurement: a slightly greater percentage of funds rely ex-clusively on relative risk (29%) than absolute risk (21%), al-

though a majority (50%) uses both.

Explicit risk hedging is utilized by a minority of funds. Just

36% of those with a formal risk management process are al-

lowed to explicitly hedge particular risks. Of those only 29%

are currently hedging any risks, including currency, interest

rates, ination, and funded status.

Formally Addressing Risk Management (continued)

What is your risk management structure approach?

Absolute risk or relative risk?

Do your guidelines allow you toexplicitly hedge particular risks?

Are you currently hedging anyparticular risks?


14/24


Although risk is clearly a priority for fund sponsors, the

majority (84%) do not employ a chief risk ofcer (CRO) or

other individual who is primarily focused on managing fund

risk. However, results vary quite a bit by fund type and size.

None of the endowments/foundations surveyed employ a

CRO, while more than one-third of corporate funds have

this position. Public funds strike a middle ground, with 16%

employing a CRO and another 16% considering hiring one.

Results are unsurprising by fund size in that the large funds

are much more likely than small funds to have, or consider

hiring, an in-house individual who is tasked with managing

risks. This is probably a matter of having the resources avail-able to dedicate an individual to these responsibilities rather

than incorporating them into an existing position.

Risk Management Stafng

Does your organization have a Chief Risk Ofcer (CRO) or similar assigned role?

Yes No, but might hire one No, will not hire one

0% 20% 40% 60% 80% 100%

Small

Medium

Large

Corporate


Public

All 16% 8% 76%

100%

16% 16% 68%

64%36%

19% 81%

56%22%22%

6% 94%


15/24


General investment consultants are the most common

source of risk management services, and the usage of dedi-

cated risk management service providers is low.

The majority of respondents (94%) employ a general invest-

ment consultant,1 though only about half of those receive

explicit risk management services from that consultant.

All of the asset owners that employ a separate risk manage-

ment rm also have a general investment consultant. Large

asset owners, which dedicate more resources to this area,

are three times as likely to use a separate risk management

provider as their small and medium fund counterparts.

Consultants

Does your organization employ ageneral investment consultant?

Does your fund employ a separate risk management consultant/advisor/provider(s)?

If yes, does your consultant provideexplicit risk management services?

No 6%

Yes

94%

Unsure 5%

Limited services 7%

Yes

46%

No

42%

Yes No

0% 20% 40% 60% 80% 100%

Small

Medium

Large


Public

All 12% 88%

100%

17% 83%

91%9%

6% 94%

78%22%

7% 93%

1 37% of total respondents were Callan clients at the time they

completed the sur vey.


16/24


The adoption of risk management tools is greater than risk

management consultants. Around one-third of respondents

use third-party resources; 10% use these tools in conjunc-

tion with in-house tools.

Whereas none of the endowments/foundations surveyed uti-

lize a dedicated risk management consultant (see page 13),

these organizations were the greatest adopters of risk man-

agement tools, with an emphasis on proprietary methods

(22%). An additional 22% of endowments/foundations use

third-party tools, either exclusively or alongside in-house

software.

In step with other survey ndings, large funds have themost resources to dedicate to r isk management and are the

most likely to purchase risk management tools from outside

vendors (61%).

Most funds (87%) monitor risk, but the levels of granularity in

these assessments vary. Top-down analysis of the total fund

is the most common approach used by funds that have risk

measurement systems; it is more prevalent at large (82%)

and medium (80%) funds than small funds (67%).

Large funds generally look at more levels than their smaller

counterparts. Factor level analysis is now only common at

large funds (47%). Very few asset owners (10%) analyze risk

at the security level.

Risk Measurement

Does your fund use proprietary orthird-party tools, such as softwareor data vendors, for risk management?

0% 20% 40% 60% 80% 100%

Small

Medium

Large

Corporate


Public

All 22%10%10% 16% 42%

22% 33%11% 22% 11%

4%8% 13% 42%33%

9% 27% 45%18%

13% 25% 63%

50% 11% 22%11%6%

13% 13% 13% 13% 47%

Yes, we use both proprietaryand third-party tools

Yes, we use in-house/proprietary tools

Yes, we use third-party tools

No, but considering investing

No, will not invest in them

At what fund level(s) do you use yourrisk monitoring system?

0% 20% 40% 60% 80% 100%

My fund doesnot have a risk

monitoring or reporting system

Analysis at thesecurity level

Analysis at thefactor level

Analysis at themanager level

Analysis at theasset class level

Top-down analysisof total fund

All Large Medium Small

71%

80%67%

82%

65%76%

67%67%

62%

60%67%

71%

29%

27%13%

47%

13%

20%13%

12%

10%

13%7%

12%


17/24


One can dene and therefore measure risk in many differ-

ent ways: experienced vs. forecasted, absolute vs. relative,

short vs. long time horizons. We posed two questions to

gauge which metrics are most valuable in measuring risk.

We observe that traditional risk metrics such as tracking error

and volatility are being supplemented with downside risk and

drawdown, particularly by public funds. Corporate funds are

embracing surplus volatility, while public funds are the largest

adopters of value at risk and conditional value at risk to better

understand their tail risks.

Nearly three-quarters (72%) of respondents measure actual

experienced risk. Twenty percent measure both actual andforecasted risk, and an additional 20% measure forecasted

risk over multiple time periods. Endowments/foundations

generally focus on a longer time frame when assessing fu-

ture risk, with 60% looking forward three to ve years and

20% looking out further than ve years. Conversely, public

funds are most likely to project shorter time frames of one

year or less (74%), potentially indicating a focus on tail risks.

Risk Measurement (continued)

What key outputs do you use tomeasure risk? What type(s) of risk do you measure?

0% 25% 50% 75% 100%

Surplus volatility

Conditional Valueat Risk

Value at Risk

Absolute drawdown(peak to trough)

Downside risk

Absolute volatility

Tracking error

65%

70%44%

60%

63%

61%56%

50%

48%57%

33%

30%

33%

43%11%10%

30%

43%22%

10%

13%

26%0%0%

13%9%

0%40%

0% 25% 50% 75% 100%

More than5 years forward

Forecasted (future) risk

3 to 5 yearsforward


1 year forwardForecasted (future) risk

Less than1 year forward


Actualexperienced

risk

All Public Endowment/Foundation Corporate

72%

74%

60%

71%

25%

42%

0%

14%

25%

21%

60%

14%

17%

32%

0%

0%

14%

16%

20%

14%


18/24


More than half of respondents with risk analysis tools can

simulate economic scenarios, in essence enabling them to

stress test their portfolios. This exercise can be especially

useful in building consensus among duciaries on how to

position the fund in a manner that reects its true risk appe-

tite, as it helps in clarifying and understanding tail risks and

exposures to various market scenarios.

Of those that have risk measurement tools, public funds

(77%) use simulations more frequently than their endow-

ment/foundation (44%) and corporate (40%) counterparts.

By fund size, large funds (71%) lead the charge, although

more than half of small funds (64%) also have this capability.

Most funds nd it useful to simulate both historical and po-

tential scenarios. For example, one might simulate how their

portfolio would have fared in the tech bubble crash, the 2008

nancial crisis, or the 1987 market crash. Future-looking sce-

narios often hinge on events that could occur, such as the

breakup of the euro or various scal cliff scenarios.

Only 4% of respondents indicate that these simulations are

not useful.

Risk Measurement: Market Simulations

Do your risk analysis tools utilize capital market and/or economic simulations?

If yes, do you nd it useful to simulate:

Yes No

0% 20% 40% 60% 80% 100%

Small

Medium

Large

Corporate


Public

All 57% 43%

56%44%

77% 23%

60%40%

40% 60%

29%71%

64% 36%

0% 10% 20% 30% 40% 50% 60% 70%

Neither

Customized future

scenarios

Actual historical

scenarios

Both 58%

31%

8%

4%


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Less than one-third of funds (31%) regularly generate a formal

risk management report. This gure jumps to 71% for large

funds and 39% for public funds. Large funds are more likely to

have dedicated staff to generate and review this type of report.

The chief investment ofcer (85%) most frequently reviews

this report, followed by investment staff (77%). The chief

risk ofcer is rarely the primary audience for a risk report,

largely because few respondents (16%) have a dedicated

individual in this function.

Risk Management Reports

Is there a formal risk management report that is generated regularly?

What group(s) are the primary audience for risk management reports?

Yes No

0% 20% 40% 60% 80% 100%

Small

Medium

Large

Corporate


Public

All 31% 69%

56%22%

39% 61%

60%18%

40% 60%

29%71%

20% 80%

0% 20% 40% 60% 80% 100%

Chief risk officer

Board

Investment committee

Staff

Chief investment officer 85%

77%

62%

46%

8%


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Investment staff (including the chief risk ofcer, where ap-

plicable) generally review risk management data quarterly

(49%) or monthly (31%), with a handful looking at it on a

weekly basis (4%). The 7% of respondents that never re-

view risk management data do not have a formal process in

place to assess or report on this type of information.

Two-thirds of investment committees and boards review

this material quarterly, likely in conjunction with committee/

board meetings. Those that never review this information

(12%) have informal, if any, risk management and measure-

ment processes, and include the funds whose staff do not

review this information.

Risk management information is typically communicated to

other stakeholders quarterly (40%) or annually (24%), if at all.

Reviewing and Communicating Risk Management Findings

How often do you review the ndings of risk management tools?

How often do you communicate risk management ndings to other stakeholders?

Annually 10%Never 12%

As needed 7%

Monthly 5%

Never 7%

As needed 9%

Weekly 4%

Quarterly 67%Monthly

31%

Quarterly

49%

Staff/CRO Investment committee/board

As needed 5%

Monthly 2%

Annually24%

N/A29%

Quarterly

40%


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Risk management involves a substantial amount of mea-

surement and data analysis overlaid with prudent judgment.

The investment committee (45%) is the body most f requent-

ly tasked with responding to the ndings of risk manage-

ment tools, followed by investment staff (24%). However,

one-fth of respondents indicate they have not yet taken ac-

tion based on risk assessments.

Endowments/foundations and corporate funds rely most

heavily on the investment committee to take action, while the

staff at public funds have more responsibility in this respect.

For those that have taken action, asset allocation changes are

most prevalent with public and corporate funds. Endowments/foundations have focused on their investment managers,

most frequently making changes to manager due diligence/

search and manager review/termination. We note that while

discussions of tail risk hedging have been lively in the insti-

tutional investor community, few funds have taken concrete

actions to implement such a hedge.

Taking Action

How does your fund decide when it isappropriate to take action based on riskmanagement tools?

Indicate what types of actions yourorganization has taken based on riskmanagement ndings.

N/A – we have not yet taken actionbased on any risk assessments

Staff/CRO decides

Investment committee decides

Board decides

0%

20%

40%

60%

80%

100%


Public All

21%

24%

45%

10%

17%

39%

28%

17%

25%

13%

63%

30%

20%

50%

0% 25% 50% 75% 100%

No actions taken

Tail risk hedging or other structured programs

Allow managersincreased flexibility in

mandates and/or the useof derivative instruments

Benchmark changes

Rebalancing decisions(e.g., implemented tactical rebalancing)

Manager review/termination

Asset class“structuring” decisions

Manager monitoring

Manager duediligence/search

Asset allocation changes(e.g., diversified assets, pursued LDI)

64%77%

33%70%

56%73%

56%30%

52%64%

44%50%

50%

50%

64%

64%

33%

30%

50%

56%

30%45%

30%22%

26%36%

10%

10%

11%5%6%

10%

0%32%

16%

22%

20%18%

22%30%

All Public

Endowment/Foundation Corporate


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One goal of examining portfolio risk is to help prepare the

fund for the impact of market volatility, and to be more aware

of potential scenarios. Looking down the road to the next

true market crisis, many funds wish to be better prepared

to avoid the worst potential outcomes. While these issues

should be addressed in a strategic, long-term investment

plan, some funds are also considering tactical moves as a

means to this end.

Many fund sponsors wrestle with whether or not to tactically

manage plan risk. Sponsors that do implement tactically must

be willing to accept the risks involved. In fact, only 30% of

sponsors have made rebalancing decisions (including but not

limited to tactical rebalancing) based on risk managementndings. Of those that have not done so, most (82%) do not

plan to in the future. Public (31%) and large (25%) funds are

most likely to use tactical implementations going forward.

Funds that have not used risk management ndings as a

tactical allocation tool identify implementation challenges

as the top structural limitation, particularly for endowments/

foundations. Corporate funds identied the frequency of

committee meetings and the ability to develop a consensus

view as the biggest challenges.

Risk-Based Tactical Moves

If you have not decided to use the riskmanagement ndings as a tactical assetallocation tool, do you plan to in the future?

What structural limitations do youforesee to implementing a tacticalstrategy to mitigate risk?

Yes No

0% 20% 40% 60% 80% 100%

Small

Medium

Large

Corporate

Endowment/

Foundation

Public

All 18% 82%

83%

31% 69%

100%

17%

17% 83%

75%25%

11% 89%

0% 20% 40% 60% 80% 1 00%

Other

Ability to develop aconsensus view

Accountability for the view developed

Frequency of

investment committeemeetings

Implementationchallenges

61%

65%

78%

40%

41%

35%

33%

50%

35%

40%

33%

40%

35%

40%11%

50%

22%

30%

22%

10%

All Public

Endowment/Foundation Corporate


23/24

About Callan Associates

Founded in 1973, Callan Associates Inc. is one of the largest independently owned investment consulting rms in the country.

Headquartered in San Francisco, California, the rm provides research, education, decision support, and advice to a broad

array of institutional investors through four distinct lines of business: Fund Sponsor Consulting, Independent Adviser Group,

Institutional Consulting Group, and the Trust Advisory Group. Callan employs more than 170 people and maintains four

regional ofces located in Denver, Chicago, Atlanta, and Summit, N.J. For more information, visit www.callan.com.

About the Callan Investments Institute

The Callan Investments Institute, established in 1980, is a source of continuing education for those in the institutional in-

vestment community. The Institute conducts conferences and workshops and provides published research, surveys, and

newsletters. The Institute strives to present the most timely and relevant research and education available so our clients and

our associates stay abreast of important trends in the investments industry.

For more information about this report, please contact:

Your Callan consultant or Anna West at [email protected]

© 2013 Callan Associates Inc.


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2013 Callan Risk Management Survey

Documents

Transcript of 2013 Callan Risk Management Survey