STAMFORD, Conn. -- GE Investments pension executives gave value at risk a passing grade for its performance during 1998's volatile markets, although VAR didn't meet expectations regarding emerging markets investments.
GE has used value at risk as a tool for monitoring risk for all of its publicly traded securities since July, said Steve Fierstein, senior financial analyst for GE Investments, which oversees General Electric Co.'s $44 billion pension fund. VAR testing began in late 1997.
In that time, VAR generally has worked well, giving GE executives a way to identify when GE's internal and external portfolio managers are deviating from their chosen benchmarks.
VAR is a statistical calculation that attempts to identify the maximum amount a portfolio is expected to lose over a specified time period, with a chosen degree of confidence. An investor might want to calculate a monthly value at risk with 95% confidence, meaning in 5% of instances, the losses in that month can be expected to be bigger. There are different VAR methods that don't necessarily arrive at the same numbers.
VAR generally performed well for GE when markets were falling quickly last year, although the risk of emerging markets wasn't properly reflected in the VAR calculations, Mr. Fierstein said.
VAR "didn't hold up as well (for emerging markets) as some people expected," he said.
The historical correlations for emerging markets turned out to be wrong. A portfolio with a mix of developed country stocks and emerging markets stocks should have had less risk than a portfolio of just developed country stocks; that didn't turn out to be the case, he said. Despite that, GE executives still find VAR calculations to be valuable, but not for predictive purposes.
Instead, GE uses it as a way to gauge relative risk.
If GE's overall value at risk is jumping or falling and the benchmark's VAR isn't, that raises a red flag that something unusual might be happening in a portfolio, he said.
"It's a warning signal," Mr. Fierstein said. "It's like having a security system in your home. The main value I see (in it) is the peace of mind." So far, GE hasn't had to use VAR to identify a serious problem, he said.
VAR is just one tool GE uses in managing risk. Mr. Fierstein groups risk management into: asset allocation, security and manager selection, trade execution and compliance, and portfolio analysis, a quantitative effort.
VAR falls into that last category, and is just one of several tools GE uses, he said.
But looking ahead, he said, he sees opportunities for GE to use VAR as more of a decision-making tool. He is watching closely the developments at the California Public Employees' Retirement System, Sacramento, which may use risk budgeting in lieu of asset allocation (Pensions & Investments, Nov. 30).
Mr. Fierstein is responsible for risk management for the overall pension fund. He has five colleagues, each responsible for one of its primary asset classes: U.S. equities, international, fixed income, private equity and real estate. For now, VAR isn't used for private equity or real estate because it would require too many assumptions to be useful, Mr. Fierstein said.
Because GE's non-pension assets are mirrors of the pension portfolio, the work he and his colleagues perform applies to GE Investment's $80 billion in total assets, which includes 401(k) assets and mutual funds.
GE uses Bankers Trust Co.'s RAROC 2020 for calculating VAR. State Street Bank & Trust Co., Boston, is GE's custodian. Mr. Fierstein receives the bulk of what he needs via e-mail with a Excel spreadsheet software file and graphs of GE's risk. For more details, the RAROC 2020 Web site contains information specific to GE.
