NEW YORK - Executives at General Motors Corp.'s $65 billion pension fund have rewritten the fund's risk standards, improving investment information flow and risk control.
The revamp by the executives of General Motors Investment Management Corp., which oversees the fund, exemplifies the efforts of pension executives at many large funds to better control fund-wide investment risk
The efforts led to development of risk control standards by a group of pension executives and money managers, and has led some large funds to appoint risk control officers.
Among the major changes at GMIMCo:
Aggregations of investment positions were made available for total fund risk analysis.
Value-at-risk was instituted for use with futures contracts and foreign exchange positions.
Guidelines for evaluating internally and externally-managed portfolios consistently were created.
Involvement in formalized risk management among the 90-plus GMIMCo employees was increased.
The effort at GM could move abroad - its executives are considering an expansion of its risk management process to its non-U.S. pension funds.
Data collection and centralization of information proved to be one of the biggest jobs in the revamp, said Desmond Mac Intyre, director-risk management for GMIMCo.
GMIMCo executives continue to work with the company's three defined benefit custodians, Bankers Trust Co., New York; Chase Manhattan Bank, New York; and Mellon Trust, Pittsburgh, on the job of collecting and managing the information needed for risk management.
Using multiple custodians has complicated that task, he said.
The first step in the risk management review process was identifying the 10 major risks at GMIMCo, Mr. Mac Intyre said.
They are: compliance risk; corporate, or financial, risk; credit, or counterparty risk; fiduciary risk; liquidity risk; market risk; modeling risk; operational risk; monitoring risk; and systems risk.
Ranking them also was key, because the number of risks facing institutional investors is so great, not all of can be addressed with the same intensity, he said.
GMIMCo began the review process using teams of employees to generate ideas, he said.
"One of the most important elements here in developing the risk standards, and the control process in the organization, has been the input of our staff," he said.
A document from the Risk Standards Working Group, a group of institutional investment executives, gave the staff a head start on developing standards.
Once task teams developed standards, everyone in the organization could provide a wish list of what they thought should be a part of GMIMCo's risk standards.
"Everyone has to feel involved, everyone is involved; and in fact, everyone should be a risk manager," he said. "Risk management is part of the investment process, so you can't let (staffers) abdicate the responsibility for that."
Much of the risk management review work involved setting up reporting procedures and what could be termed mundane operational controls.
"Risk management is not all bells and whistles, it's not just value at risk and lovely graphic packages," Mr. Mac Intyre said,
"It is essentially kicking the tires of investment decisions. It's about questioning every move you make in the business."
Mr. Mac Intyre joined GMIMCo in June 1996 from General Motors' subsidiary Vauxhall Motors Ltd., London, where he was director of pension investment and analysis.
"Accountability is the biggest form of risk control in any organization," he said. "All I'm doing is providing the focus for the organization, so we can look at (risk) in a constructive manner."
Conversely, he said, the overall standards must stand alone, and not be dependent on one individual for long-term implementation.
Regarding derivatives, Mr. Mac Intyre said GMIMCo uses them for risk management, such as hedging or in overlays. The firm limits itself to exchange-traded, plain vanilla, derivatives.
He said it's important to not view derivatives positions in isolation: "To look at currency overlay or a hedging ratio for international equities, in isolation to that asset class, is naive. You really have to look at its impact on the overall plan."
GMIMCo has a rigorous procedure for evaluating counterparties and derivatives exchanges it uses.
In addition, GMIMCo has developed a value-at-risk reporting capability for futures and foreign exchange positions, with the help of its custodians. Value at risk is a mathematical estimation of the dollar amount at risk given certain market scenarios.
For futures, VAR at GMIMCo is used primarily for calculating margin exposures. For foreign exchange, VAR is used mainly for setting dollar limits for counterparties. Foreign exchange limits are placed on the mark-to-market values - how much counterparties owe GMIMCo - and for the value-at-risk, he said.
But Mr. Mac Intyre doesn't see VAR as useful for the overall fund. The time horizons used to calculate it generally are too short, he said, although that is beginning to change.
Mr. Mac Intyre said GMIMCo's risk standards for private equity have made progress, but he declined to elaborate, because the work isn't finished.
As a result of the changes, the investment unit has greatly improved its ability to look at risk on a consolidated basis.
Much of GMIMCo's risk appetite flows from the fund's asset-liability benchmark, with the company reviewing its asset-liability match every three years; capital market assumptions within that match are reviewed every year.
GMIMCo's internal asset mix system compares total fund exposures with where they should be, using appropriate benchmarks within its target asset mix.
Currently, the system is internally run, but cumbersome and somewhat expensive to use, Mr. Mac Intyre said.
Ideally, the information should be provided by custodians, he said. But because GMIMCo uses three custodians, aggregating information is complicated.
In its day-to-day business, the risk that portfolio managers are taking on unintended bets, or violating guidelines, is probably the key risk GMIMCo executives face, Mr. Mac Intyre said.
Risk-adjusted performance measures are key, as are risk limits and stress testing, he said.
You can't really separate risk analysis from performance analysis, he said. If a manager is making a large return, obviously he or she is taking on some kind of risk to gain those returns, he said.
All external managers are reviewed at least twice a year.
In addition, GMIMCo executives have developed guidelines for reviewing both internal and external portfolios in a consistent manner, he said.
The changes to GMIMCo's risk management didn't entail a big organizational restructuring. The existing matrix reporting structure already served as a strong form of risk control.
A matrix structure creates multiple lines of reporting. For instance, the company's back-office and support staff reports to both its own area and to the financial controls and accounting area. "If they have a problem, they have two lines of communication where they can address their concerns," Mr. Mac Intyre said.
On the investment side, the vice president of research has analysts who work across the spectrum of functions within GMIMCo. "It helps create an environment where solutions don't have to be found in isolation," he said.
GMIMCo targets both vertical and horizontal risks. A vertical risk is specific to one unit of the company, while a horizontal risk cuts across all areas.
Moreover, GMIMCo's existing organizational structure was well tailored to the creating new risk management standards. "You could actually take one investment area and build a model, having built that model . . . 80% of the work was done. You could apply that right across the organization," Mr. Mac Intyre said.
About 20% must be customized to each area, he said. That gives different areas common benchmarks and goals, further facilitating management of risk.
Grading the system
The risk control system itself is benchmarked and evaluated through four grades, or stages: identification of the task or shortfall; identification of the plan or structure to resolve it; the process of resolving the task; and completion of the task.
But Mr. Mac Intyre noted the process is never over. While the standards as written might be met, "things change," he said.
Hence, there's a requirement that each task be revisited at specified, regular time periods.
He said that W. Allen Reed, president of GMIMCo, took the lead in advocating strong risk management, and the unit gets strong support from GM at the corporate level as well.