|
The
first choice for people in pensions Pensions
Age has been designed to provide pensions professionals with a single
and authoritative source |
|
Rated
and recommended The latest CAPS figures showed that pooled pension funds suffered a negative return for the second consecutive year (the first time there have been two negative years in row since 1973/74) with a balanced fund median for 2001 at -11.9 per cent. This dismal picture has combined with recent events in the pensions world, such as the Unilever vs Merrill Lynch case, to place fund performance in the spotlight. Fund managers and pension scheme trustees alike are now reassessing their approach to risk. Part of this concerns the measurement process itself. The “information ratio” is one of the most important tools in active fund management, as all investors, no matter what their attitude to risk, will seek the highest information ratio possible. Defined as excess return divided by the risk that has been generated, it is also considered the most effective and accurate way of measuring a pooled fund manager’s performance. Clients, too, are calling for increased information on risk and return. Jim Owen, co-head of institutional marketing at Credit Suisse, explains: “I think there has been a demand from trustees to properly understand how performance is attained by managers and, on that basis, the demand for more information and explanation is growing.” He adds that developments in the market are being driven by a change in client requirements. “The demand being put on pension schemes by FRS 17, the demise of the MFR, and the move towards DC are all elements that are pushing pooled pension fund development, and leading to the move from median-type benchmarks to more client-specific benchmarks,” he says. Owen claims that developments like the gradual drift away from briefs that only have benchmarks related to the CAPS median towards ones where the briefs are more client-specific and recognise liabilities and surpluses within specific schemes, are more common. “This is a trend that has been underway now for three or four years, and has been gathering momentum,” he claims. The information ratio’s accuracy is also commonly held to be highly reliable. Robin Geffen, global chief investment officer at Orbitex, explains: “Basically there is nowhere to hide with an information ratio, because you are consistently, over every period you are looking at it, measuring the number crunching. You measure the percentage skill rate that goes into turning the units of risk into units of return, and at the end of the day it is a very objective calculation.” According to Martin Veasey, head of investment risk at Gartmore, the point of the information ratio is to seek to risk adjust returns so that you can attempt to differentiate between a fund manager who is naturally very skilled at making investments and therefore can get a good return with relatively little risk, and a fund manager who basically does well but largely by taking large exposure to the market place. He adds that the level of risk taken is key: “You can be an extremely good fund manager who’s really good at converting risk into return, but if you don’t take enough risk in the first place, if you were, for example, to invest money too close to the benchmark in something that looked like a passive mandate, then even the best manager in the world isn’t going to be able to scrape up too much out-performance.” Another method of measuring risk is the Sharpe method, which has a similar definition to the information ratio but doesn’t take into account the benchmark and is therefore defined as excess return over cash. However, both the information ration and the Sharpe method are not without their problems. Veasey says that information gathering is one of the main setbacks. “The main problem is gathering data. This is fine if you are looking at your performance against an index, but if you are subscribing to WM or the CAPS figures and looking at your performance against the peer group, the problem is that you only get a snapshot of what the rest of the market is doing, fairly infrequently,” he says. He explains that regional economic differences are also problematic because a number which would be a good information ratio for the UK market isn’t necessarily going to be very exciting when looking at Japan or emerging markets in the Pacific Rim. Geffen agrees that because it is statistically based, you need to ensure that the same themes and the same process of running the fund are in place to ensure consistency. “Obviously if the team or the process changes, then the information ratio is no longer reliable. As soon as you get a change in either of those, you have to throw that past away and start again,” he asserts. However, there are those who believe measuring risk should be conducted independently, rather than in a fund management house. For Geffen, the information ratio is clear cut, precise, mathematically coherent and is easily calculated, and he believes it can and should be conducted independently. He says: “Every fund manager should be subscribing to an external fund measurement service, particularly for their pooled vehicles. I honestly believe that the whole Merrill Lynch Unilever case would never have happened if the funds had been externally measured, as the two issues would have been very apparent. First of all, a massively high risk level, and secondly, an appalling information ratio. The two taken together show the benefit of measuring risk externally.” He believes that when the CAPS pooled pension fund figures are published, the active risk level at the end of the year and the information ratio for the year should be published at the same time so that people can see the raw performance number. “I just think it gives you an awful lot more information about the manager you have chosen than just looking at a raw number,” he asserts. According to Geffen, this need stems from increased demand by the consulting actuary and investment consultant community, who are beginning to subscribe to risk reporting. He says: “There is going to be increasing demand, because the investment consulting community is getting more and more concerned about managers who do not subscribe to a risk reporting service. They want to know why they are not subscribing, and will want anybody that is on the CAPS survey to include their funds in risk reporting so that they can directly compare everyone. I feel that it should be a condition of being in the CAPS survey that you subscribe to risk reporting, and that the data should be published jointly.” For
Veasey, the key issue regarding the information ratio is that it’s
an attempt to form the bridge between the level of risk and the
level of return. He concludes: “If pension scheme trustees are concerned
and interested about making sure that they get reasonable returns
without too much volatility, then you absolutely do need to have
that bridge built.”
BACK
TO FEBUARY FEATURES
|
 |
|
