Investment executives whose funds were untouched by derivatives, real estate or securities lending losses are nevertheless intensifying their risk management efforts following the huge losses suffered by other investors.
And some have taken risk management a step further by instituting their own controls:
GTE Corp. created a new staff position solely to look at risk management. Several other large corporate funds reportedly are considering doing the same.
The pension fund of the World Bank is using an investment team with a strong risk management background.
The Common Fund, a manager of managers for college endowments, also created a new risk management position.
Ron Peyton, president of Callan Associates Inc., San Francisco, said the new emphasis on risk management is being driven by senior management. Senior managers - horrified by some of the losses they have been reading about - realize such losses are potential career-breakers, he said.
Bankers Trust Co., New York, is offering to help, marketing a highly touted software product to 70 of the largest and most sophisticated pension funds. Chrysler Corp. already uses it, and other funds - including Kaiser Permanente and Lockheed Martin Corp. - are showing interest.
Although an object of a lawsuit over how it sold some adverse-performing derivatives to Procter & Gamble Co., Bankers Trust is offering to help pension funds with Raroc 2020, a risk management software product. A version of the software is being used by Bankers Trust itself to evaluate its own risks, including derivatives.
The $12.5 billion Chrysler pension fund is using the software as part of its master trust services. Russell Flynn, pension director, raved about its capability and ease.
Mr. Flynn uses Raroc "to identify the risk that we take and actually quantify the risks that we make," he said. "It breaks it down into interest rate risk, currency risk, equity risk, optionality, and identifies and quantifies - which is the big thing that we have been unable to do in the past. So you can quantify your risks in absolute dollars."
Janice K. Murphy, vice president and treasurer at Kaiser Permanente, Oakland, Calif., with $3.3 billion in assets, said she also is interested in looking at the software. But that is only part of the heightened interest in risk management. Ms. Murphy said she also intends to look over the fund's investment guidelines and agreements with money managers.
George Weintz, investment counsel for Lockheed Martin, Bethesda, Md., with more than $11.5 billion in assets, also is looking at Raroc. Mr. Weintz - who said his fund got high marks from a "third party" brought in to study his fund's risk management controls - said pension funds have been more careful today about defining the risks their funds are willing to take. Funds now are wrestling with the issue of who should determine the assignment and degree of risk.
At GTE, which has more than $15 billion in pension assets, John Carroll, president, said he has created a new position on the staff solely to look at risk management. Risk management will be examined internally and externally.
"There has been an assumption in our business that the risk controls and procedures present at many of the organizations that we work with are sufficient, and I think that now there is some questioning as to whether they are," said Mr. Carroll.
"We are trying to get a better handle on how to look at the risk exposure for our portfolio in total. That goes beyond the obvious derivatives exposure. I think that the developments over the last 18 months or so were such that we're not any longer taking for granted that the controls we had in the past are adequate. I think a number of funds are thinking that way," added Mr. Carroll.
GTE, Stamford, Conn., also will look over risk management software, Mr. Carroll said.
Emphasis on risk management is paramount at the World Bank pension fund, said Afsaneh Mashayekhi Beschloss, director of the pension department.
She said she and the people hired for her World Bank investment team have a "very, very strong risk management background."
"The sense I get is that risk management (hasn't) been a strong area at most pension funds. A lot of people are groping as to what (risk management) means. People have been more interested in returns than having a consistent approach for risk management," she said.
The $18 billion Common Fund, Westport, Conn., is interviewing applicants for its risk management position.
The Common Fund sustained a well-publicized, $138 million loss when one trader at the former First Capital Strategists, York, Pa., hid his losses for two years.
Risk management will have a "broader mandate" at the Common Fund, said John Griswold, a senior vice president. The mandate will include investment risk, operational risk, credit risk, business risk, investment guidelines, auditing and compliance.
Meanwhile, State Street Bank & Trust Co., Boston, just released new database software called Private Edge that bank officials say will spot troubles in real estate and private equity.
The opportunity for custodians in risk management services was highlighted in 1994 with the release of RiskMetrics by J.P. Morgan & Co. RiskMetrics is a market version of J.P. Morgan's in-house risk management system.
Jim Kaplan, president of Capital Management Sciences, Los Angeles, said the marketing muscle of Bankers Trust and State Street Bank also should spur sharp interest in risk management software available from independent sources like his company and BARRA Inc., Berkeley, Calif.
"All of the sell-side firms have had these risk tools in place.....They haven't shared those models with the buy side because it hasn't been in their interest to do so. Now Bankers is saying that since things have gotten so messed up, the only way they are going to create a reasonable market for these class of securities is actually to provide the buyers with some of the tools," said Mr. Kaplan.
Peter F. Landini, a senior vice president at Fremont Investment Advisors, San Francisco, which oversees Bechtel Power Corp.'s more than $2.5 billion in pension assets, said risk evaluation software would be interesting to look at, but he doubts any system is foolproof.
He also notes that risk and return are generally tied together, so lowering the risk exposure means lower long term return.
Cost is another matter.
If a risk evaluation system and the staffing of it cost $250,000 a year to operate, but a pension plan investment team didn't plan to use it often, the cost would be prohibitively high, Mr. Landini said.