Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Innovation Investing Conference
    • 2022 Defined Contribution East Conference
    • 2022 ESG Investing Conference
    • 2022 DC Investment Lineup Conference
    • 2022 Alternatives Investing Conference
Breadcrumb
  1. Home
  2. Print
March 22, 1999 12:00 AM

NEW APPROACH: NOVARTIS 401(K) PLAN ADOPTS RISK MANAGEMENT; LACK OF MUTUAL FUNDS MAKES PROCESS EASIER

Paul G. Barr
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    NEW YORK -- Novartis Corp. has begun using value at risk and other risk management techniques for the company's $2 billion 401(k) plan.

    The use of VAR in analyzing a defined contribution plan is unusual, but not unique, according to risk experts.

    "It places them in the league of the very few firms who have begun to use things like allocation of risk," said Tanya Styblo Beder, principal with Capital Market Risk Advisors Inc., New York.

    While many pension executives are still considering the usefulness of VAR for managing defined benefit assets, Novartis is applying the strategy to its 401(k) plan. (Bankers Trust, Novartis' defined benefit custodian, already assists Novartis with risk management for its $2 billion defined benefit fund.)

    Another tool

    The process would be much more difficult, though, if Novartis used mutual funds as options in its defined contribution plan. The plan instead uses commingled funds, separate accounts and unitized separate accounts.

    Novartis already uses Alerts, another risk management tool, for monitoring defined contribution portfolios.

    Alerts is an investment compliance service offered by the fund's custodian, The Northern Trust Co., Chicago.

    Novartis also is using "normal portfolios" in evaluating its fund's investment managers.

    "Two or three years ago, it was risk monitoring. Today, it's 'how do we manage risk?' " said William McHugh, vice president and treasurer at Novartis.

    Risk monitoring came into vogue after a slew of unauthorized trades at various financial institutions led to billions of dollars in losses in 1994 and 1995.

    Risk management takes it a step further by applying the risk monitoring techniques in the construction of an investment portfolio.

    "At the end of the day, we want to have one common language, one way of looking at" the company's defined contribution managers and portfolios, and strong risk management is a way to get closer to that goal, Mr. McHugh said.

    'So far ahead'

    Moreover, Novartis pension executives are seeking consistency in selecting, evaluating and monitoring managers, another benefit to using a standardized risk gauge like VAR.

    "Novartis is so far ahead . . .," said Donald S. Rieck, who is manager of Northern's integrated risk group.

    Northern will calculate value at risk on a quarterly basis for each of Novartis' defined contribution managers for various benchmarks, and for the plan's options as a whole.

    The process is simplified by the fact that Novartis doesn't use mutual funds, although it does use commingled funds.

    More sharing

    VAR analysis would be impossible unless the mutual fund managers were willing to share their holdings information more frequently than they are required to do, Mr. McHugh said. Even with commingled funds, getting holdings data can be an issue.

    Others agreed.

    "The key to the whole thing is getting monthly portfolio holdings from the investment managers," said Adele Heller, managing director for BARRA RogersCasey, Darien, Conn.

    Doing that with mutual fund managers is not that easy, but it's not impossible, Ms. Heller said.

    For defined contribution plans she's worked with, it can take good, strong negotiating skills or existing relationships to get a mutual fund manager to deliver a monthly holdings report, she said.

    A preliminary VAR report will be produced by Northern for the fund's 1998 fourth-quarter returns and a full one for the first quarter of this year. Northern offers the report in hard copy or via the Internet.

    Mr. McHugh said he's not expecting any surprises.

    "We have a good idea of the risk our managers are making" by way of BARRA Inc.-produced factor analysis, he said.

    VAR will be used a number of ways in the defined contribution plan: as an absolute gauge of risk; to track risk over time; and to measure risk relative to benchmarks, Mr. McHugh said.

    Novartis executives will look at the total risk of each of its nine defined contribution options and at each manager's portfolio, Mr. McHugh said. Novartis uses multiple managers for the five plan options that are actively managed.

    Different application

    Unlike its defined benefit plan, however, Novartis' 401(k) plan won't be tracked for risk at a total plan level, because participants decide the allocations, Mr. McHugh said.

    If there is a big change in risk as tracked by VAR -- such as a manager making overly concentrated investment bets -- Novartis executives would tell the firm to "rein in the risk," he said.

    The same would hold true if a manager were not being aggressive enough, he said.

    Novartis executives also would shift allocations of managers within investment options were VAR to indicate that risk was getting out of line, he said.

    Novartis executives expect to get more out of VAR in the future. "The information becomes more meaningful to us (after) we have a little history behind it," Mr. McHugh said. "I think it's going to become a more powerful tool for us."

    VAR also will be calculated on each manager's normal portfolio -- a benchmark portfolio constructed out of the manager's expected universe of stocks -- and on more traditional benchmarks.

    With that information, Novartis executives will use VAR to track how much risk Novartis' external managers are taking relative to the market.

    More information

    The combination of tools available to Novartis gives fund executives a lot more information to use in evaluating managers, Mr. McHugh said.

    "Hopefully, we will know a lot more than their average client," he said.

    The fund's external managers generally are familiar with the concept of normal portfolios, he said; value at risk hasn't caught on as much, but is gaining acceptance.

    "Unfortunately, different managers calculate VAR in different ways," he said.

    Novartis executives haven't yet had the opportunity to sit down with any of their external managers to specifically discuss VAR, because of the newness of the information.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    Alternatives: Investing Across the Spectrum
    Sponsored Content: Alternatives: Investing Across the Spectrum

    Reader Poll

    May 9, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Are Factors a Thing of the Past?
    Q2 2022 Credit Outlook: Carry On
    Leverage does not equal risk
    Is there a mid-cap gap in your DC plan?
    Out of the Shadows: The Revolution in Shadow Accounting
    The pivotal role of fixed income markets in the ESG revolution
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    May 9, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Innovation Investing Conference
      • 2022 Defined Contribution East Conference
      • 2022 ESG Investing Conference
      • 2022 DC Investment Lineup Conference
      • 2022 Alternatives Investing Conference