J.P. Morgan Investment Management Inc., State Street Corp. and Credit Suisse Asset Management Corp. are among the first money managers entering the high-stakes race to launch risk management products and services for pension funds.
They'll be competing with Measurerisk.com, which was just launched this summer, as well as more veteran vendors such as BARRA Inc., Deutsche Bank and several custodian banks that offer risk management services, including Citibank, which licensed a BARRA system a couple of years ago.
J.P. Morgan Investment Management in New York and Boston-based State Street's Askari risk management unit expect to unveil new tools by October.
Credit Suisse Asset Management's three-person team joined the firm about six months ago from J.P. Morgan Investment Management. Eric Stubbs, director of strategic advisory, Francis Gupta and Yogi Thambiah. The group is working to both service clients and produce extensive research on risk management.
J.P. Morgan is now working with about a dozen clients doing the beta testing process for its system, which will be called PensionMetrics, according to Michael Granito, managing director. "We have both corporate and public pension plans that are interested and working with us" on the test, he said.
State Street officials believe it's premature to comment on its plans, according to spokeswoman Allison Riley.
"This is a good time for the race -- there's a lot of talk now and people are starting to make purchasing decisions" about risk management products, said Kelsey Biggers, president and chief executive officer of Measurerisk.com, New York.
Mr. Biggers' firm is working with one major client, GTE Investment Management Corp, Stamford, Conn.
"Managers are increasingly seeing it (risk management) as integral to the investment process," said Credit Suisse's Mr. Stubbs. "The fact that you have several top firms focusing on it shows how much the priority has been raised."
Patrick Mitchell, chief investment officer of the California State Teachers' Retirement System, Sacramento -- which as of July 6 crossed the $100 billion mark with $101.5 billion in assets -- said he has been approached by all of the firms named above.
"We have a high level of interest but it's difficult to get your arms around it," said Mr. Mitchell.
At a July 7 meeting of the CalSTRS board of trustees, a presentation on risk management and control alternatives was made to the board by Mr. Mitchell. The board then directed Mr. Mitchell, along with executives at Pension Consulting Alliance, to explore traditional and non-traditional risk measurement and risk control alternatives. A report is due to the board in February 2000 regarding the viability of alternatives and the scope of the risk measurement and risk control processes available.
Mr. Mitchell said buying a risk management system is a bit "like buying a car. There are some great autos out there and you can't decide if you want a BMW or a Mercedes. But whichever you choose you know you'll need air conditioning. It's a question of will you pay extra for other items."
Officials at the California Public Employees' Retirement System, who have been in the forefront of the risk budgeting process, are known to have talked with Measurerisk.com about its product.
"It's a fair characterization to say that the area is bubbling," said Brad Pacheco, a spokesman for the $133 billion, Sacramento-based system. "Now we're trying to evaluate what's out there and talk to folks to see what meets our needs."
The $77 billion Tallahassee-based State Board of Administration of Florida's economics department is working on a risk budget strategy it hopes will be adopted in the fall, according to Tom Herndon, executive director.
"Askari was in with us last week," said Kevin SigRist, assistant chief economist for Florida. "We want to see what new products are offered and how they can be used in a risk budget framework."
"A lot of these products are crafted for broker-dealers," who, he said, have a much shorter time horizon for their investments. "When you have a pension fund with an investment horizon over 40 years, you need products to provide something actionable," he added.
Harris Lirtzman, director of risk management for the New York City Retirement System, said he has met with people from Askari and has a meeting planned with executives from Measurerisk.com.
"We acquired our risk management system from our custodian, Citibank, about two years ago," he said. Providing risk measurement was part of the RFP when the $55 billion system hired Citibank as its custodian.
The traditional practice of getting risk management services from a custodian bank "may be changing," he said. "We may be getting to the point with all this technology that it's cheaper (for the pension fund) to license the technology (itself)," he added.
Steven Fierstein, senior financial analyst with GE Investment Corp., Stamford, Conn., which oversees GE's $58 billion in pension assets, said he's talked to people about some of the new products, but as of now plans to stick with Deutsche Bank's RAROC 2020.
"It takes a lot of time to get a risk management system up and running," he said. He's confident Deutsche Bank will support the system and put resources behind it.
However, he's happy new systems are being developed. "It's good to have a lot of competing products out there to see which is the best. I like to talk to other plan sponsors to see what they're doing," he said.
Measurerisk.com's Mr. Biggers said he is concerned about State Street and its Askari service as a competitor, but not as much with J.P. Morgan. "My view of J.P. Morgan is they've done a great job on discussing the methodology, but not done as well with software (development)," said Mr. Biggers. "I think they're late to the table in the pension market and for specifically addressing the institutional investor market."
BARRA also "is a little late to the risk game," according to Mr. Biggers. "Their software is geared toward the money manager, not the plan sponsor."
"I think he may be saying that because perhaps he's not aware of what we've been doing," said Morgan's Mr. Granito.
He pointed out that through the firm's RiskMetrics unit -- which is developing the software for its new service -- it has been working with financial institutions, including institutional investors, for many years. This includes a firm that is now a competitor, State Street.
"We had been and continue to work with State Street in its performance measurement group," said Ethan Berman, chief executive officer of RiskMetrics.
Mr. Berman added there are about 20 to 30 pension funds around the world now using the firm's RiskManager software.
All of these new competitors are not scaring off the veterans. BARRA recently launched BARRA TotalRisk for Asset Management, a new risk management system designed specifically for asset managers, pension fund managers and custody banks.
Aamir Sheikh, senior vice president of enterprise risk at BARRA, who oversees the new TotalRisk product, said he is "surprised" by Mr. Biggers' comment. "BARRA has been in the risk management business working for asset managers for 25 years. We were the first people in the field -- literally," he said.
"BARRA's approach lends itself to use by pension funds," because of its huge data base, which provides a wide range of investment information that pension funds might not be able to assemble on their own, he added.
RAROC 2020, which was started by Bankers Trust Co., New York, is not conceding any business to the new systems. An executive with Deutsche Bank who asked not to be named said the bank, which closed last month on its purchase of Bankers Trust, is very enthusiastic about RAROC and intends to put more resources behind it. "We've been doing this for the last four years; we've been adding staff for the last few months and we've been working to get new clients," said the executive.