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With so much volatility going on in the region, and in fact, in the world, investors are doubly cautious in the choice of investments they make. In assessing risk, what are the factors that need to be considered before making any investment decision? In the age of technology and volumes of data, where does ‘intellect’ fit in?
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Risk-adjusted performance measurementrequires ‘intellectual firepower’by Darwin Jayson Mariano
With so much volatility going on in the region, and in fact, in the world, investors are doubly cautious in the choice of investments they make. Will it be in stocks or bonds? Could be both. What percentage goes to each basket and how much yield one expects to get are now based on a whole host of factors, primary of which is measuring return by taking into account the risks involved in producing that return – what we call, risk-adjusted performance measurement.
In dealing with risk-adjusted performance or risk-adjusted return, there are five principal risk measures to consider: alpha, beta, r-squared,
standard deviation and the Sharpe ratio. Each risk measure is unique in how it measures risk. In comparing two or more potential investments, an investor should always compare the same risk measures to each different investment in order to get a relative performance perspective.*
In our interview with Madhu Gayer, Head of Invest-ment Reporting and Performance - Asia Pacific for BNP Paribas Securities Services, he identified the main challenges in risk adjusted performance measurement and according to him this can be summed up in three significant factors – data, methodologies and people.
DATAWhen thinking about risk-adjusted performance and risk-adjusted returns, suddenly you
have to think a lot more about the data elements and where the systems are actually built in order to cope with the enormous needs. The influx of data that comes from multiple sources could be massive and adequate systems must be put in place to be able to crunch these numbers and get meaningful information out of it.
METHODOLOGIESDifferent organizations have different methodologies and there’s no single best method that can be applied across all organizations.
Moreover, there’s always new methodologies, new risk statistics coming up all the time. The important thing is that one must have an established set of practices and standards to follow in order to make the whole process smooth and efficient.
PEOPLETypically, you can categorize this group as either performance people or risk people. Whatever group they belong, what’s important is for
these people to have the right mastery of the data, tools, methods that are available to them and use it to further the interests of everystakeholder involved.
Of the three factors described above, perhaps the most important and most critical factor is people. In our interview with Madhu Gayer,
he weighed in on this: “I think it all comes down to people. The question we need to ask is do people dealing with risk-adjusted performance measure-ment have the intellectual firepower, the training, the world experience to convert the numbers into meaningful information for boards, trustees, asset managers and CEOs to act upon.
In his current role, (Editor’s note: Madhu Gayer is a newly appointed APAC head of investment report-ing and performance for BNP Paribas Securities Services), Madhu spoke about his own challenges.
“The challenges that I’m seeing my clients face are more on the region of how to cope with the systems, how to cope with the data and how to cope with the reporting as well. Where do they get the information from, how do they present it, and how do people actually make use of the numbers so that they can get informed decisions out of the numbers.”
Reeling from the aftermath of the global recession caused by, some would argue, wanton disregard of risks in making billions of dollars of investments, in-vestors these days would better be served if a per-fect balance of risk and return would be achieved through a great deal of intellect.
Hear more from Madhu Gayer as he speaks about Overcoming key challenges in risk adjusted performance at the Investment Performance and Risk Management (IPARM) Asia 2013.
To attend the conference, send an email to [email protected] or call +65 6722 9388. You can download the event brochure here.
The question we need to ask is do people dealing with risk-adjusted performance measure-ment have the intellectual fire-power, the training, the world ex-perience to convert the numbers into meaningful information.- Madhu Gayer,BNP Paribas Securities Services
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About IPARM Asia 2013:
The Investment Performance and Risk Management (IPARM) Asia 2013 conference is the ONLY gathering of investment risk and performance professionals in Asia. This year’s theme: Utilise best performance measurement, attribution and risk- management practices to maximise your portfolio return. Our 2013 Distinguished Speakers include top executives from BlackRock Asset Management, BNP Paribas Securities Services, AXA Investment Managers Asia, Aberdeen Asset Management, BNY Mellon Asset Management, among others.
About the Author:Darwin Jayson Mariano is an Online Content Strategist and the Regional Editor - Asia for International Quality & Productivity Center (IQPC). You can contact him on Twitter @whoisdarwin or email [email protected]
*http://www.investopedia.com/terms/r/riskadjustedreturn.p#axzz2DTrtW8jf
