Governance and Risk Management Structures for Fund Management

Transcription

1 Governance and Risk Management Structures for Fund Management Caribbean Center for Monetary Studies 11 th Annual Senior Policy Level Seminar May 25, 2007 Port of Spain, Trinidad and Tobago Sudhir Rajkumar Head, Pension Investment Partnerships World Bank Treasury tel: (202) treasury.worldbank.org

2 Investment Framework Governing Board Accounting & Reporting Investment Policy Information Technology Performance Measurement Investment Management Risk Management 2

3 Guiding Principles Every Fund has a unique risk profile based on: the liability characteristics of the Fund; and the size of the Fund relative to its liabilities; Good governance = Clear separation of roles and accountabilities; Board should own the Fund s risk profile (both SAA & Risk Budget); Policy decisions need to be clearly articulated and documented; Risk usage and return should be monitored and reported regularly; Structural changes may require a review of Investment Policy (e.g. availability of new asset classes, demographic profile of beneficiaries, cash-flow needs, capacity of domestic markets, ability to hedge currency risk). 3

4 Organizational Structure Internal Audit Periodic review of processes and procedures Governing Board Investment Policy Overall Risk Budget Oversight Legal Counsel Controller Financial Statements Internal Control Environment Investment Committee Investment Guidelines Risk Allocation External vs In-house Mgmt. Accounting & Valuations Pricing Accounting Reconciliation Settlement & Control Bank balances Trade settlement Operational risk measurement Risk & Analytics Risk Benchmarks Performance Investment Management In-house Mgmt. Mgmt. of Ext. Managers Active risk Mgmt. 4

5 Investment Policy: Roles GOVERNING BOARD INVESTMENT COMMITTEE Staff Approves Investment Policy: Fund Objectives, Investment Horizon, Risk Tolerance & Metrics, Eligible Asset Classes, SAA Sets Investment Guidelines & Policy Benchmark, Risk Budget For TAA or Active Risk Implements Investment Policy and Allocate Risk to portfolio managers And to TAA within overall Budget 5

6 Strategic Asset Allocation Process 1. Fund Objectives and Investment Horizon 2. Risk Tolerance and Other Constraints

7 Translating Risk Tolerance into Metrics The maximum contribution rate * is 22% Avoid low funded ratios (Staff and Retirees Objective) Maximize Return (max. wealth of Fund) Avoid high contributions (Plan Sponsor s Objective) The minimum funded ratio * is 85% * There is a 5% probability that these levels are exceeded in the next year.

8 Optimal Portfolios for Different Investors Efficient frontier: set of portfolios which have the highest possible expected total return for a given risk level.

9 In-house Management versus External Managers Benchmark for Internal Management Skills & Technology Sharing External Asset Management Enhancing Risk-Adjusted Returns Access to Resource Intensive Investment Strategies/Asset Classes Reduce Staff Turnover Risk Reduce Cost

10 External Managers Staff Accountabilities

11 IT Systems and Data Flows In-house Management External Market Data Pricing Benchmark Trade Entry Middle- Ware Portfolio Mgmt System Settlement Performance Risk & Compliance Accounting Payment SWIFT Front Office Middle Office Back Office World Bank G/L Data Warehouse Mgmt Reporting suitable for high volume high risk

12 IT Systems and Data Flows External Managers Manager 3

13 Types of Risk Risk can be deployed in one of two ways: Strategic asset allocation Active risk taking E x p e c t e d r e t u r n Active Risk SAA (µ) Risk (σ)

14 Three Stages of Risk Management II. Risk Attribution Where does our risk come from? Which decisions contributed to risk? Risk Management I.Risk Measurement What is our risk? How do we measure our risk? III. Risk Allocation How do we utilize and manage risk going forward? How do we want to allocate risk?

15 Different Accountabilities for Different Risks Total Plan Investments Strategic Asset Allocation Active Management Benchmark: Liabilities Tactical Asset Allocation 1. TAA Across Asset Classes Benchmark: SAA weights 2. TAA Within Asset Classes Benchmark: SAA benchmarks 3. Misfit/Benchmark Risk Manager Selection Benchmark: Manager benchmarks

16 Risk Budgeting - Who Owns What? Total Risk Budget TE Total Overall risk budget set by investment committee Chief investment officer delegates responsibility to portfolio managers by giving them a risk budget for the purpose of portfolio construction and TAA Equities Fixed Income Overlay Alternatives IR TE Equities TE FI IR IR TE Overlay No Active Risk Risk allocation/budget for alternative asset classes is based on Absolute Risk Risk budget allocated to portfolio managers Portfolio managers allocate their risk budget to strategies, styles, external managers, and TAA

17 Role of a Custodian Value Added functions Performance reporting & Compliance check Cash management Risk & Return analysis Core functions Settlement & Safekeeping Portfolio Accounting & Reporting Securities lending Benefit payment Tax reclamation

18 Custodian: Core Functions Settlement and Safekeeping Trade settlement Asset delivery Safekeeping of assets Portfolio Accounting and Reporting Portfolio accounting and consolidated reporting Dividend & Interest income collection Asset valuation / Security pricing Corporate action processing Administrative support

19 Reporting Content and Frequency Governing Board: Quarterly ν Size/Composition ν Performance ν Risk Investment Committee: Monthly ν Size/Composition ν Risk ν Performance Department Manager: Daily ν Size/Composition ν Risk ν Performance ν Limit violations Portfolio Managers: Daily sub-portfolio level ν Cash position ν Holdings ν Risk ν Performance ν Limit violations 19

20 Investment Framework Governing Board Accounting & Reporting Investment Policy Information Technology Performance Measurement Investment Management Risk Management 20