Two analytical firms are collaborating to publish quarterly value-at-risk measures on a wide variety of active manager style peer groups and indexes, in much the same way return performance typically is presented and compared.
"You have mountains of data on performance," said Kelsey Biggers, president, Measurisk.com, New York, "but not much on risk."
Measurisk.com, together with Russell/Mellon Analytical Services LLC, will produce the value-at-risk measures. They will rank managers by quartiles based on their VAR measures. The presentation will include floating bar charts, including ranking high, low and median managers in the style peer groups and the index benchmark.
The measures will give fund sponsors benchmarks for comparing their managers' risk. The risk universe analysis will provide quartile ranking and the range of active managers' risk within each style.
For example, Measurisk.com calculated the VAR for the 87 active managers in the Russell/Mellon universe that benchmark themselves to the Russell 2000 small-cap stock index.
The median manager had a VAR of 13.7%, as of Dec. 31. But VARs for the 87 managers ranged from a low of 8.8% to a high of 20.87%. The Russell 2000 index had a VAR of 13.9%. The VAR of the Standard & Poor's 500 stock index, also as of Dec. 31, was 8.4%.
A manager's having a high or low VAR isn't in itself superior or inferior.
"Having less risk (a low VAR) is not necessarily a good thing," Mr. Biggers said. "In an up market, having less risk means you'll probably underperform the benchmark."
On the other hand, "with an active manager you'd probably like to see a VAR higher relative to the benchmark. A manager having a market view (that is, having a VAR equal to the index benchmark) runs the risk of being a closet indexer. But you probably don't want to have too much risk. Are you comfortable with losing 20% of your portfolio" in any one month, which would be a VAR of 20%?
"You want a pension fund setting VAR tolerances at the board level," Mr. Biggers said.
VAR is a statistical measure of the downside loss potential of a portfolio within a certain confidence level.
A VAR in the Measurisk.com calculations shows, at a 95% confidence level, the risk of losing the VAR percentage in the worst month of the next 20-month period. So a VAR of 20% indicates a chance of losing 20% of the value of a portfolio in one month.
The index and manager universe risk measures "will provide sponsors with benchmarks of value at risk to compare their portfolio managers to an index and to a universe of active managers," said Mark Hansen, managing director-global sales, Russell/Mellon Analytical, Tacoma, Wash.
Starting in October, the two firms will begin publishing VAR on 600 managers, divided into nine domestic equity style universes. In addition, they will publish VAR on a number of benchmark indexes, including 18 Russell domestic equity indexes, Mr. Biggers said.
The style universes include large- and small-cap and growth and value managers. In October, the joint venture will present quarterly VARs on the manager style universes and the indexes for the first three quarters of 2000 and all of 1999, said Mr. Biggers.
"Analysis of risk has been the underfocused side of the risk/return equation," Mr. Biggers said.
The VAR rankings presentation "is going to be a powerful tool in investment management, in addition to asset allocation and modern portfolio theory."
A lot of pension fund sponsors are giving consideration to risk budgeting, a method of asset allocating by risk. "But one of the problems of risk budgeting is you need standards," Mr. Biggers said. "People can now begin to set standards because there will be benchmarks" for VAR.
"You can't manage performance," Mr. Biggers said. "The only variable you can manage is risk. How much risk are you willing to tolerate?"
The joint venture will express the value at risk measure as a percentage, the result of comparing a portfolio -- whether a Russell index or an active manager in a Russell universe -- against 1,000 scenario simulations to see what impact each scenario would have on it.
Russell/Mellon will provide the Russell indexes and nine manager universes, while Measurisk will calculate the VARs. Mr. Hansen said each of the universes has between 50 and 100 managers.
Russell/Mellon is a joint venture of Frank Russell Co., Tacoma, and Mellon Bank, Pittsburgh. Measurisk.com is owned by employees and by a group of outside investors, consisting of Morgan Stanley Dean Witter Inc., New York, Bank of Bermuda, and XL Capital Ltd., Bermuda.
