A working draft of risk management standards and practices for institutional investors has been created by a group of 11 pension, endowment, foundation and insurance executives.
The 33 standards are designed to fill a gap in risk management: addressing the specific needs of tax-exempt investors, who often parcel out big chunks of their assets to external managers.
The group, which calls itself the Risk Standards Working Group, is now seeking comment on the standards from about 100 other tax-exempt investors, as well as money managers, broker-dealers, academics, consultants, auditors, custodians and exchanges.
Comment will be accepted until mid-August, with final recommendations expected to be released by mid-September.
"Many of us felt kind of a vacuum existed" regarding risk management geared directly to plan sponsor-type investing, said Richard Rose, a working group member who is chief investment officer for the San Diego County Employees' Retirement Association, San Diego.
He said other publicly available risk management guidelines - such as the Group of Thirty report - are geared toward a different type of investing than the type pension plan sponsors do, which includes the hiring of outside managers.
"The tools designed for risk management have really come out of the dealer world," said Michael deMarco, another member and director of risk management for GTE Investment Management Corp, Stamford, Conn., which manages GTE Corp.'s pension fund.
Because dealers' generally short-term-focused trading desks face different risks from plan sponsors, with their long-term investment focus, the risk standards should be different too, he said.
For example, "our issues for credit risk are rather different," he said. The group's standards try to address all types of risk facing managers of large pools of assets and look at the risks from many different angles.
The risks plan sponsors face are "very broad and very deep at the same time," said Christopher J. Campisano, another working group member, who is manager-trust investments for Xerox Corp., Stamford, Conn. For example, an investor might have a disaster recovery plan for itself, but do all of its external managers? And if the managers have backup plans, do they work? "This is a very real risk," he said.
While Mr. Campisano was at a different pension fund, the building of one of its managers was destroyed by a bomb in London, he said. It was a big question as to what was happening to the pension fund's money.
And while derivatives, which have been linked to some major unexpected losses in recent years, are addressed in the standards, they are not the main thrust.
"Derivatives (guidelines) don't capture rogue traders," for example, said working group member Jon Lukomnik, deputy comptroller for pensions for the City of New York.
Controlling derivative usage is only one element of risk management, he said.
In addition, members of the group say the standards aren't a checklist of procedures or a directive as to what represents the proper amount of risk for a pension fund.
Instead, the standards are an attempt at giving plan sponsors a benchmark to make sure they ask the right questions.
These are some tools for investors to use to manage all types of risk; the group hopes investors will find some useful, Mr. Lukomnik said.
The standards in many ways represent "a paradigm shift" in the relationship between money managers and the pension funds that hire them, said Tanya Styblo Beder, principal for Capital Market Advisors Inc., a New York consulting firm that acted as coordinator and technical adviser to the group.
Typically, money managers are paid based on their assets under management or with some type of performance-related fee, with a zero relationship to the risks they are taking.
These standards encourage investors of pools of assets to find out how much risk their managers are taking, and not focus on performance, good or bad, Ms. Beder said.
For example, some plan sponsors had thought they hired some great stock-picking international equity managers, but it turned they were actually good currency pickers, she said.
These types of things are addressed by the standards.
The standards also give some guidance on the issue of daily pricing, which really isn't possible for the piece of a plan sponsor's assets in, say, real estate or private equity, according to Ms. Beder.
The working group didn't release the guidelines publicly because they want to integrate comments from outsiders into the standards first.
There might be something in the standards that might be desirable but just not workable, Xerox's Mr. Campisano said.
Furthermore, because the standards are meant to be goals, not requirements, it is highly unlikely any plan sponsor meets all of the standards right now, Mr. Campisano said.
Mr. deMarco of GTE said the group was formed as a result of a number of executives trying to seek more information on risk management.
His involvement came as a result of his appointment as head of risk management at GTE Investment Management in October.
In seeking information from Maarten Nederlof, vice president of Capital Market Risk Advisors, Mr. deMarco got involved in the concept of putting a diverse group of investors together to work on the project.
Other members of the group are: Suzanne Brenner, manager, Rockefeller Foundation, New York; Kevin Byrne, vice president and treasurer, The Equitable Cos. Inc., New York; Mary Cottrill, principal investment officer, California Public Employees' Retirement System, Sacramento; David Russ, director, of alternative investments, Pacific Telesis Group, San Francisco, Calif.; James D. Seymour, vice president and acting independent risk oversight officer, The Common Fund; Kathy Wassmann, investment manager, R.R. Donnelley & Sons Co. Inc., Chicago; and Gregory Williamson, investment manager, Amoco Corp.
The standards are meant to represent the views of the working group members, not necessarily their respective employers.
