Watch before You Invest - Aspects of Risk Management as an Asset Manager Carl McGann Chief Operating Officer- Investments Asia Pacific ex-japan i n i i n N
Not so long ago... -.. l-jfear Returns /63% China Food Inflation Fears To Spur Price Controls?H WMurh.---'""^.^ $.S&P 500 MSCIACAF 63 0 -' - TViay-07 Sep-07 Source: Bloomberg, October 2007
The World has Changed i isobn f Amerca 142 has 40 Jun-C ub bep-u«uec-ua Mar-uy Jun-uy 6ep-uy / O/f / " -I AC APxJ MSCI AC World Source: Bloomberg, 30 September 2009 I fj I I II M Jl I
Risk Management - A Holistic View from the Buy side Investment Management Process BEFORE INVESTMENT DURING INVESTMENT AFTER INVESTMENT Counterparty Risk Market & Regulator Due Diligence New Instrument Approval Portfolio Risk Investment Guidelines Compliance Rules Portfolio Risk Capacity Management Source: FIL Limited, September 2009
Counterparty Risk
Why Was There So Little Focus on Default Risk? t.-s Decomposition of Sterling-Denominated Investment Grade Corporate Bond Spreads Residual (including compensation for illiquidity) Compensation for uncertainty about default losses Compensation for expected default losses Total spread Basis points 8OO 7OO 6OO 5OO 4OO 3OO 2OO 100 1997 98 99 2OOO O1 O2 O3 OS O9 O Sources: Bloomberg, Merrill Lynch, Thomson Datastream and Bank calculations. Source; Bank of England Financial Stability Report, June 2009
What about the Rating Agencies? US Investment Banks - CDS history (5 year - Senior) US Investment Banks - Share prices (Rebased) Before After crisis Current Ratings crisis (Dec 2008) (Oct 2009) JP Morgan Aa2 Aa2 Aa3 Goldman Aa3 A1 MS Ci Q..d ro Q Q. 400 200 0 Jan-04 Dec-04 Nov-05 Ocl-06 Sep-07 Aug-08 Jul-09 JP Morgan Goldman Morgan Stanley Citigroup Merrill Lynch -Lehman Jan-07 Jul-07 Jan-08 Jul-08 - JP Morgan Goldman Sachs Citigroup Merrill Lynch Jan-09 Jul-09 Morgan Stanley - - Lehman Brothers Source: Bloomberg, October 2009
What is the Aim of Counterparty Research? -* *> m Jj mil Protect the assets of investors from risk of default & loss through dealings with counterparties Have a broad enough number of counterparties to ensure we can achieve best execution on behalf of our investors ^^M AMM^M«MHHMMj Independence of approval & execution is key Source: F1L Limited, September 2009
Key Research Challenges - as a Global Investor m mi] n Large number of potential counterparties for a global organisation a 410 counterparties globally-42% North America, 30% Australasia, 28% Europe Frequently private, small or foreign counterparties n Highly leveraged & usually opaque Total Counterparties by Rating Other 2% A 0% 13% Counterparty Exposure by Rating Other A 3% 0% B 54% Source: FIL Limited, data as of 6 October 2009 includes both FMR & FIL counterparties
SSFSSrajPS! %&S$^.'*t&&teurKift!tsg,^:._. Counterparty Research & Analysis Group 19 counterparty risk professionals located in Boston, London & Hong Kong n A long history - established following the collapse of Barings in 1995 Independent of the trading and investment management functions n The Group conducts fundamental due diligence/research on all of Fidelity's trading counterparties globally - just like all our other company analysts just different focus Covers all of Fidelity's trading desks located in Boston, London & Hong Kong n Leverages-off & provides input to investment analysts (approx 630 Managers and Analysts) Source; FIL Limited, October 2009 10
I Fidelity's Counterparty Approval Process j i T Research Inputs Financial Statements Background Company Information Due Diligence Meeting Regulatory and Legal Filings Other, (Trading desk, investment analyst views, etc.) Comprehensive Analysis Analytical Outputs Formal Research Note Counterparty Rating ivation of Trading Code Control Procedures addition of New Counterparty to Approved.1st radinq Desk Notification Source: FIL Limited, September 2009 11
The Process in Action - Lehman Brothers Fidelity CRA Rating Bi-weekly calls with Lehman Brothers initiated Bear Sterns taken over by JP Morgan Second internal downgrade Lehman Brothers filed for bankruptcy Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Lehman Brothers Moody's Rating Change CRA Rating Change Source: Bloomberg, FIL, November 2008 12
Market & Regulator Due Diligence
Markets We Trade in Across the Globe Reviewed Global Markets Jf 1HM... Over 70 markets actively traded Source: FIL Limited, October 2009. Colours above refer to approvals for equities or futures & options.
Fidelity International New Markets Committee (FINMaC) Process * f jf t A global independent Committee comprising Investment Administration, Risk Management, Regulatory Strategy, Trading, ClOs, COOs & Investment Compliance Regular quarterly meetings to review & approve new market submissions & proposed changes to existing approved markets GENERAL COUNTRY OVERVIEW COUNTRY-WIDE INVESTMENT ISSUES EXCHANGE SPECIFIC ISSUES INVESTMENT ADMINISTRATION a Economic environment & outlook a Political environment & sovereign risk n Currency risk a Banking sector risk a Foreign Exchange n Foreign & Other Ownership Restrictions n Taxation Regime a Market / Exchange Holidays a Exchange Membership a Regulation a Liquidity n Equity Trading a Equity Settlement & Clearing n Corporate Actions & Dividends a Pricing a Corporate Governance / Proxy Voting a Sub-Custodians a Central Depository / Registration a Compliance Source: FIL Limited, September 2009 15
Markets We Trade in Across the Globe Reviewed Global Markets i Source: FIL Limited, October 2009. Colours above refer to approvals for equities or futures & options. 16
Key Conclusions if There has been an increased focus on all aspects of investment risk management over the past 18-24 months as the operating environment has become increasingly uncertain The investment risk management process must consider risk before, during and after investing - risks before investing have regained attention lately given the significant change in the risk landscape The key requirements for a comprehensive risk management framework are technology & information, robust processes, the right expertise, a risk conscious corporate culture and independence & segregation of duties - this requires scale, resources and commitment through the cycles Source: FIL Limited, September 2009 17
Appendix
Carl McGann - Chief Operating Officer - APxJ Investments Professional Experience 2006 - Present 2005-2006 2002-2005 1999-2002 1998-1999 1997-1998 1994-1997 1989-1994 Chief Operating Officer Fidelity International, Hong Kong Head of Investment Services Fidelity International, Hong Kong Head of Adviser Services, Products and Platforms Zurich Financial Services, Australia Head of Strategy, Distribution Zurich Financial Services, Australia Vice President, Sales and Relationship Management Bankers Trust, Australia Vice President, 2IC of Singapore BT Funds Management, Singapore Vice President, National Manager Investor Services Bankers Trust, Australia Senior Accountant, Audit and Advisory Services Ernst & Young Chartered Accountants, Australia Education and Qualifications B.Comm. (Accounting and Finance), University of New South Wales, Australia Graduate Diploma and Member, Australian Institute of Company Directors Chartered Accountant Source: FIL Limited 19
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