Risk Management and Performance

Risk Management
Risk management is the central focus of best-practice institutions. In seeking to 'maximise return' the Guardians are mindful of the inherent risks. These risks are accepted because they offer a reasonable expectation of compensation in the form of returns above the risk free rate over the time horizon of the Fund. Risks accepted in order to pursue the investment objective fall into two categories - market risk and manager risk:

a) Market Risk

The Fund holds exposure over a wide range of assets, all of which will produce returns divergent from the risk free rate. Principal exposures include:

  • Broad equity market risk, both globally and in the USA;

  • Currency exposure. This includes changes in the value of the the USA dollar and of the foreign currencies in which a portion of the Fund's assets are held;

  • Default and credit migration risk within the fixed income assets;

  • Non-uniform performance within broad asset markets. Examples include divergence in returns by sector, geographic region, growth vs. value and large vs. small stocks;

  • Return uncertainties within the property and illiquid asset investments.

b) Manager Risk

The requirements on the Fund's external investment managers to deliver superior returns also entail some risks. In particular, appointed managers may exceed or fall short of the objectives set for them by the Board.

The broad investment principle of the Fund is to take sufficient investment risk to be confident of meeting its return objectives. Achieving this return does not come from a single source; rather it is achieved by holding a range of exposures to different types of markets, market factors and managers. A core function of the Fund is to ensure that these risks are as well spread as possible and that each has received appropriate weight. The reliance on each factor will reflect:

  • The relative size of the excess returns on offer;
  • How reliable these returns are likely to be; and
  • The inter-connections between the various investments of the Fund.

Explicit specification of each investment risk allows an appropriate exposure to be taken to that factor.

c) Operational Risk

In addition to the market and manager risks there are operational risks. The Guardians have developed risk management policies, procedures, guidelines and other internal controls for application by the management team, external investment managers, and other service providers. An annual audited report on internal control procedures is prepared by an independent audit firm and presented to the audit and governance committee of the Board.

Risk management is further supported by a Code of Conduct and Conflict of Interest Policy to guide the Board and management team, defined roles and responsibilities, individual and collective performance accountability processes, and timely disclosure and communication.