Risk management

Sophia Grene

Synthetic ETFs – an efficient way to use modern financial technology to do something useful for investors or a sinister investment banking kinda plot to cream off extra revenue from naive investors who just want to track an index?

In Monday’s FTfm, former Eurizon chief executive Francis Candylaftis called for these evil instruments to be cast into the outer darkness. This sparked a thoughtful explanation by FT Alphaville of precisely where the problem might lie (hint – it’s about the bit where you need collateral), using db x-trackers’ own diagram of how it all works.

Then blogger Andrew Clavell picked up the theme, suggesting a much firmer regulatory hand on the collateral would solve the problem.

Does anyone else have any suggestions?

Ruth Sullivan

Pensions bonanza cancelled

Pensions bonanza cancelled

Now it’s official – the much trumpeted pension buy-out market has fallen flat. And just to spell it out, a report by Punter Southall called the False Dawn reveals that most (about 84 per cent) pension schemes trying to transfer liabilities to an insurer through a buy-out would find it cheaper to just adopt the same low-risk investment strategy an insurer would use.

Sophia Grene

Perhaps it is inevitable that companies continue to perform their core business even after they have spectacularly messed up, but sometimes it does take your breath away.

The temptation to tell ratings agency Moody’s about the beam in its own eye is almost irresistible. Yesterday it downgraded the operational rating of some funds because:

… Marathon’s investment and liquidity risk monitoring processes, although very strong, could be enhanced by incorporating additional shocks into a global stress test. In Moody’s view, such additional stress testing would have strengthened Marathon’s ability to cope with the market dislocation over the past year. Moody’s noted that the quality of all of the funds’ other major operational areas, such as valuation, operations, corporate functions and service providers continue to be viewed as excellent. Moody’s believes the valuation processes and back office operations have functioned particularly well during the recent periods of great market stress.

Moody’s is one of the companies currently being sued for alleged ‘negligent misrepresentation’ in its ratings of special investment vehicles, and part of an industry sector widely blamed for having failed to understand the cumulative impact of the risks it was rating.

The pot is calling the kettle black. And in this case, the pot is the sooty item and the kettle only a little tarnished.

Sophia Grene

“Behold, my child, the Nordic man, and be as like him as you can,” exhorted Hilaire Belloc in Talking (and Singing) of the Nordic man.

That was before “Taking the Temperature“, a recent report from Insight Investment and Ethix SRI Advisors, found the 40 largest companies in the Nordic region are lagging significantly behind their European peers in their management of climate change risks and opportunities.

Am I the only one who thought, along with Belloc, the Nordic region was full of hearty outdoor types who would understand the importance of climate change? Apparently, although the companies surveyed are trying to sort out their governance and management with respect to climate change, most of them expect to increase their greenhouse gas emissions in the future.

It is particularly ironic given the commitment of the Norwegian government pension fund to ethical and sustainable investment. Clearly the domestic fund, which invests solely in Norwegian securities, has failed to demand sufficient of its investee companies.

Pauline Skypala

There is a chart in a new report from the World Economic Forum that should give anyone designing a pension plan pause for thought. It shows what a lottery defined contribution pensions can be, with Japan a particularly good example.

Based on certain assumptions, the chart (on page 48 of the report) shows a hypthetical Japanese worker retiring just before 1990 would have enjoyed retirement income equivalent to 60 per cent of earnings after contributing 5 per cent a year for 40 years investing in a 60/40 combination of domestic equities and bonds. But the unlucky one retiring 10 years later would have had to survive on 10 per cent.

Sophia Grene

The most dangerous flight I ever took was in a ten seater plane going to the smallest of Ireland’s Aran Islands. The danger was not so much the size of the plane as landing on Inis Meain, the last of the three islands, so there were five take-off and landing events to survive.

According to a new measure of risk proposed by Luca Anderlini and Leonardo Felli on the website Vox EU, that trip had an SVI of three. The Systemic Vulnerability Index they suggest would measure the risk of an indirect security in extreme market conditions by assuming additional risk is added with every layer. Thus if you buy a German government bond yourself, that has an SVI of 1. If you commission a bank to buy it and sell you a mirror image contract, that has an SVI of 2. A CDO squared could have an SVI of 3 or 4.

Pauline Skypala

Jérôme Kerviel: well known workaholic

Enforced holidays are not unusual in the current climate as companies seek to cut costs by encouarging staff to take extra holiday for little or no pay.

But the chief investment officer of an asset management firm visiting the FT revealed his enforced holiday, coming up soon, was due to a policy put in place to guard against rogue traders. It was instigated in response to Société Générale’s €4.9bn trading loss at the hands of trader Jérôme Kerviel, revealed in January 2008.

Mr Kerviel did not go on holiday much, apparently, having had four days off in the eight months before the problems were discovered. He was asked to take a break in December 2007 but declined to do so. He had to be at work to maintain his deception about the large trades he was making. Failing to demand he take time off was seen in retrospect as a mistake.

The FT reported at the time that most investment banks require traders to take at least two consecutive weeks’ holiday a year, which limits the scope for concealing their positions.

Asset managers have followed their lead, it seems, with this group, Baring Asset Management, imposing a minimum eight day break. Workaholics are not allowed to indulge their addiction.

How common is such a policy in the asset management world I wonder?

Sophia Grene

After a hideous year in financial markets last year, many investors might well feel angry with their financial advisers. Most, however, will restrict themselves to grumbling or perhaps the occasional courtcase.

Such mild action is not for the senior citizens of Southern Germany – a group of four unhappy investors kidnapped the financial adviser who had helped them put their money into overseas properties, losing as much as E2.4m between them.

Sophia Grene

Bottoms up

Bottoms up

Have asset managers lost the skill of predicting global macroeconomic trends? While there has been no shortage of economic augury from fund managers’ corporate communications departments, Fitch Ratings has questioned whether the soothsayers of modern asset managers are thoroughly trained in the reading of entrails to predict macro trends.

Given the ratings agency was also saying the current environment is one in which investors who understand the big picture will win, this is a slightly worrying idea.

Sophia Grene

Rainforest in Panama

Rainforest in Panama

Did you have an egg or bacon for breakfast? Did you use shampoo or showergel containing palm oil this morning? If you did, the chances are a little bit of the rainforest was destroyed for your morning.

“We are eating the rainforest every day without knowing it,” says Andrew Mitchell, head of the Forest Footprint Disclosure project steering committee and executive director of the Global Canopy Programme. If you are a fund manager, your investments are also probably responsible for large swathes of tropical rainforest being bulldozed.

About the blog

FTfm is no longer updated but it remains open as an archive.

FTfm's specialist writing team offer their insights into the global fund management industry.

About the authors

Pauline Skypala has been editor of FTfm for four years having previously been deputy personal finance editor. She joined the FT in 1999 and has been writing on savings and investment issues throughout her career.

Steve Johnson, FTfm deputy editor, has been a journalist for 17 years, 10 of which have been with the FT.

Sophia Grene, reporter on FTfm, has been a financial journalist in print and online for 12 years.

Ruth Sullivan has worked as a financial/business journalist and foreign correspondent and for the past 10 years has been at the FT.