NEW YORK - Watson Wyatt Investment Consulting Inc. was scheduled to unveil the U.S. version of its new risk-budgeting software by the end of April.
For seven months, the Chicago-based consulting firm has offered a service named Alpha Pro to its non-U.S. clients. The tool allows consultants the ability to help clients examine individual managers' investment risks and returns, as well as fees and governance. "Quantifying people's expectations helps in the process," said Chris Ford, a consultant in Watson Wyatt's New York office and one of the software's architects.
Alpha Pro helps Watson Wyatt clients to position their managers in ways that are most advantageous to them, said Mr. Ford. He drew comparisons between the program and an asset-liability model. "You need to be realistic about what is possible and what is not," said Mr. Ford. He believes too few investors of all kinds do risk budgeting.
The U.S. version of the program took longer to develop because "risk attribution" is more extensive, Mr. Ford said. He found U.S. clients to be more tolerant of risk than those in other countries.
Programs that examine managers are by no means new.
Manager optimizing tools can be quite useful, said Steven Nesbitt, senior managing director of Wilshire Associates Inc., Santa Monica, Calif. His firm has offered the Wilshire Compass program for two to three years. Compass is an online service sold to Wilshire clients. Approximately 125 of Wilshire's 230 clients use the tool, Mr. Nesbitt added.
The Compass program helps clients in "budgeting how much risk (they) can take," said Mr. Nesbitt. "It's very difficult to put together an algorithm for risk tolerance." He said he was not familiar with Alpha Pro.
Despite the effort put into developing Alpha Pro, Watson Wyatt is keeping it low profile. "It's not appropriate for all clients," Mr. Ford warned. Alpha Pro is only recommended to clients if Watson Wyatt sees a need for it. In addition, the Alpha Pro software is made available only to Watson Wyatt consultants, not directly to clients.
The 1.5 billion ($2.2 billion) pension fund of Cable & Wireless PLC, Milton Keynes, England, has diversified its portfolio and experienced growth as a result of Alpha Pro, said Peter Hampton, secretary to the trustee company. The fund has used the program since 1998, when it was still in development. Following the program's advice, Cable & Wireless invested in hedge funds and private equity for the first time, said Mr. Hampton, neither of which is popular with U.K. pension funds.