Inside Money: Risk and regularity: a uniform approach
9:30 AM Thursday Sep 13, 2012
Photo / Thinkstock
Risk has taken on a new sense of urgency in the funds management industry since the onset of what is now known as the GFC.
As well as prompting existential analysis (and in some cases the blotting out of existence), the GFC has encouraged an industry-wide overhaul of risk-management strategies 'stress-testing', for example, has become a fashionable exercise.
But it's not just the funds management entities themselves that have become risk-revisonaries, regulators and legislators are also getting in on the trend.
New Zealand's Financial Market Conduct bill, for instance, is partly concerned with caging in investment risk.
The New Zealand government, through its Crown Ownership Monitoring Unit (COMU) is also keeping a closer eye on the collective risks undertaken by the public-owned investment funds.
The COMU 2011 report notes that it "is not clear whether the level of discretionary risk taken by each CFI [Crown Financial Institution] is optimal".
"However, with the size of the CFI portfolio (in terms of assets and liabilities) forecast to grow over time, the Government will continue to monitor the level of discretionary risk being borne across the CFI portfolio, and maintain comfort as the Crown balance sheet changes," the COMU report says.
The Australian Securities and Investments Commission (ASIC) this week also released a review of risk management in the funds management industry that found "the sophistication of risk management systems varied greatly".
ASIC's Report 298, titled 'Adequacy of risk management systems of responsible entities', seems to be concerned with eliminating that variety, proposing a number of systemic upgrades.
Given Australian banks dominate New Zealand's funds management industry, ASIC's demand for uniform risk control will probably flow on here.
ASIC identifies risk problems at both ends of the funds industry. For boutique investment funds, the regulator frets about 'key person risk' ie the over-reliance on star personalities (some New Zealand examples may spring to mind). And the town's big end, ASIC notes uneasily, is just getting fatter.
"The managed funds industry is undergoing significant transformation as a result of the global financial crisis and continuing market instability, volatility and uncertain market sentiment," the report says. "This environment is exacerbating risk aversion and creating higher expectations from retail investors, as well as increasing cost pressures and reducing inflows; these factors are driving responsible entities to integrate and consolidate.
"Business integration poses new and emerging risks that need to be managed by a number of the selected responsible entities."
And maybe there's another risk that ASIC doesn't articulate: the risk of regulatory-imposed uniformity.
NZ's markets hit a 4 year high based on nothing of real substance, they simply followed the irrational exuberance of Europe and the US.
Want a sure fire investment strategy in NZ? Watch what happens on Wall Street and duplicate it here the following day. There is no logic in where markets are these days.
I'm not a fan of the free market but if you are going to operate one then at least have the decency to let it be truly free and stop manipulating shares and currencies!
It will be interesting to see how the markets fare when the QE lifeblood is taken away from them. Even more interesting if the plebs ever wake up to how they have been scammed for the last lot of years.
Again the banks totally annally retentive demand that only bricks and mortar qualify as security for funding and thus makes no allowance for risk or possibility of loss of any kind which us normal for businesses which just so happens to be a competitive enterprise from more so called riskier investments such as disruptive technology inventions new processes, medical breakthroughs etc again stymies and focuses investment were little return on funds can be expected.
Therefore the prognosis is for a deepening recession -worldwide depression. This time however the banks won't survive simply because of rapid climate change of which the banks contributed in a major fashion to bring about and near zero investment to the contrary. No doubt the will be manhunts by vengeful element towards the senior members in the near future for their willing part in this sorry saga.