Investment Portfolio Analytics and Risk Assessment
Successfully managing the risk/return profiles of bank, endowment, insurance company and pension fund investment portfolios requires experience and skills in equity, fixed income, alternatives and structured product analysis, corporate finance, risk management and economics. Rutter Associates’ partners, affiliates and quantitative analysts apply these experiences and skills to helping chief investment officers and their teams achieve their objectives of maximizing return subject to limits on the likelihood of defined levels of underperformance and loss (and subject to internal or regulatory asset allocation limits).
Rutter Associates also works with regulators, auditors, and risk management teams to monitor and assess the effectiveness of policies and procedures in place to ensure that the investment portfolio is operating in a manner consistent with its stated purpose and within regulatory and internal risk limits.
Over the past decade, Rutter Associates has worked with state regulators to examine the investment and risk management processes of three of the ten largest retirement funds in the Pensions and Investments 1000, and many of the leading North American Life & Annuity and P&C insurance companies and guarantors. In each of these, our team made recommendations for improved processes as well as “checking the boxes” in the categories described below. We have also built and maintained a shortfall risk-based portfolio model for the multi-billion-dollar endowment of a major healthcare system and worked with companies looking to explain their investment and risk management processes to rating agencies and regulatory authorities.
Investment Risk is the possibility that investment returns will fall short of expectations. This can occur due to changes in market conditions or to failures of people and processes. Rutter Associates recognizes that investment risk-taking needs to be managed or optimized and not minimized; efficient risk-taking is an input required to produce investment returns (a riskless portfolio will earn a risk-free rate, e.g., a Treasury yield).
Risk and expected return are to be balanced. The key risks on which Rutter Associates focuses in helping Chief Investment Officers, Chief Risk Officers and Regulators include:
Liquidity Risk: The inability to meet liabilities as they arise due to insufficient cash on hand and/or the inability to liquidate assets sufficiently quickly and without catastrophically adverse “fire sale” price effects when required.
Model Risks associated with valuing and analyzing complex assets and derivatives.
• Are all models documented?
• Are all models validated to assure performance as expected by individuals independent of model development?
Asset/Liability Management Risk: the risk of loss due to risk parameter mismatches across the balance sheet. For example: is the net duration of assets and liabilities being maintained within established limits? If derivatives are used by the investment team to hedge optionality in variable annuities, are delta, gamma, rho and vega monitored and hedged within established guidelines?
Operational Risks (people, processes, systems)
• Are board-approved Risk Appetite and Tolerance Statements in place?
• Are comprehensive Risk Management Policies and Procedures, Investment Guidelines and Derivative Usage documents in place?
• Is there a formal code of ethics in place?
• Are risks and returns monitored and reported in a thorough and timely manner by qualified personnel and to appropriate Executive and Board committees?
• Are risks and returns quantified by market-accepted standards?
• Do investment and risk personnel fully understand risk/return profiles of asset classes (publicly traded and private assets) and derivatives?
• Are investment management and risk management compensation schemes consistent with incentivizing desired behaviors and outcomes?
• Are investment management and risk management systems and data adequate for the tasks to which they are put?