The $143 billion Stichting Pensioenfonds ABP is the first pension fund to install new software able to predict planwide value at risk numbers over a one-year period across asset classes and currencies.
The Microsoft Windows-based software is expected to lessen pension executives' worries about unanticipated investment risk.
Developed jointly by ABP of Heerleen, the Netherlands, and BARRA Inc. of Berkeley, Calif., Total Plan Risk software can identify a pension fund's value at risk with a statistical confidence level of up to 95%, according to BARRA officials.
"The Total Plan Risk analysis gives us insights into the risk exposures of the fund," said Jean Frijns, chief investment officer of ABP.
"We see the (software) system as an important step toward integrating all of the fund's assets including listed, unlisted and alternative investments with an overall perspective," he said.
In the United States. BARRA has gained the involvement of leading thinkers in risk management among corporate pension plans.
"I think it (the new software) represents a solid starting point" at measuring total plan risk, said Desmond Mac Intyre, director of risk management at General Motors Investment Management Corp., New York, which oversees the $65 billion General Motors Corp. pension plan.
Mr. Mac Intyre is a member of an advisory group evaluating the software. BARRA already is working on more advanced versions of it.
BARRA is "well represented with plan sponsors at the portfolio level," said Mr. Mac Intyre. This new software, he said, is a "kind of natural building block to take it up to the enterprisewide level."
BARRA has about 100 clients who subscribe to both its equity and fixed-income risk models that predict risk separately for each asset class. BARRA officials believe many of those clients will be willing to add some additional software to existing systems to measure plan- or firmwide total risk.
'No small task'
Developing risk measurement software at the plan level "is no small task," said Elisa K. Spain, senior vice president for strategic development at The Northern Trust Co., Chicago. Northern Trust has talked with software companies, including BARRA, about Northern offering plan risk measurement services to its clients. Those discussions are continuing.
Most software that uses current portfolio holdings to predict risk can only do so at the portfolio level -- not at the plan level using multiple asset classes and different currencies. And BARRA officials claim they have the only commercially available software that can estimate plan-level risk accurately with a horizon well beyond trading risk software horizons of a day or week into the future. The top trading risk measurement programs are offered in UNIX systems, difficult for many plan sponsors to use.
BARRA's software is expensive (BARRA officials won't give a price) for all but the large pension funds and money managers. But smaller funds and managers are expected to access it through bank custodians, which lease it from BARRA.
Following ABP's lead, a few other large European pensions funds also have leased BARRA's software, although BARRA declined to identify them.
U.S. pension funds, including that of GTE Corp., Stamford, Conn., are examining the software, and some very large, multiasset-class money manager clients of BARRA are getting a free trial period. BARRA declined to release their names.
Ever since corporate and public pension executives saw that huge investment losses could be their downfall, investment risk measurement has been a hot topic.
Some ability to measure risk already exists. Firms like Capital Management Sciences, Los Angeles, can predict risk in fixed income and BARRA has been able to do it in fixed income and equities.
But individual securities, portfolios and currencies all interact, and huge risks can be created in the aggregate. Software has existed for traders to look at aggregate portfolios, but the risk horizon has only gone out for a day or week, according to Paul Green, marketing manager for BARRA.
Pension funds want to be able to look at all of their portfolios in all asset classes in the aggregate -- as well as individually -- into the future for risk, longer term.
BARRA officials said they have done that by integrating the securities data, risk models and system software they provide for their 800 sophisticated clients around the world.
Software also has existed for looking at risk using returns-based analysis. However, returns-based analysis looks at what has occurred in the past, rather than predicting risk. A money manager, based on returns analysis, could be identified as having a particular style in the past, but if the money manager changes portfolio holdings significantly, the past style is not an indication of the risk the new portfolio holds.
As powerful as BARRA officials claim the new software is, they say it doesn't mean the end to risk problems. It can't stop rogue traders or fraud. It won't stop operational risks or a breakdown in other investment systems. But they say the new software is an important advancement in analyzing the risk of portfolios with multiasset-class holdings.
Still, "senior executives want to know what their exposures are in aggregate across asset classes, across managers, across individual securities -- both traded and non-traded securities, a whole range of risks that might be inherent in a plan," said Kamal Duggirala, BARRA's president.
ABP's interest in software that could measure total plan risk wasn't surprising, said Mr. Duggirala. He described ABP investment officials as "advanced thinkers."
He said BARRA has had a consulting relationship with them. "ABP (investment officials) wanted to investigate better ways to measure and to monitor the risks of the plan and that eventually led to an off-the-shelf (software) product," he said.
Normally the United States is considered the most advanced country in risk measurement. However, European pension plans were the first to express strong interest in total-plan-risk software because of very stringent financial regulations concerning market risk and value at risk for European banks "much more so than in the U.S.," said Mr. Duggirala.
ABP, he said, has asked BARRA to advance the software ability to handle non-traded investments, like venture capital, and for an advanced set of scenario analyses.