Barra helps Hong Kong hospital fund get good handle on risk

By Alysha Webb

HONG KONG — Eighteen asset managers handling the investments of four lifestyle funds led to a risk assessment headache for the US$3 billion Hospital Authority Provident Fund Scheme of Hong Kong.

In an effort to get a better handle on the risk of the total fund and each of its four components, fund officials turned to the TotalRisk enterprise management system of Barra Inc., Berkeley, Calif.

Each of the 18 managers invests a portion of each lifestyle fund, and previously each manager submitted a monthly performance report with risk level and numbers to the fund. But with so many different managers working on each fund, "it was very difficult to have a very holistic picture of the risk level of each fund," said Winnie Pao, director of investment supervision for HAPFS.

Different managers also had different methods of reporting risk and return.

Using TotalRisk allows fund officials to evaluate individual managers' performance, and each fund's risk level, she said. "With a tool like Barra's system, you can more or less identify the sources of outperformance or underperformance in each manager."

Barra's TotalRisk system helps HAPFS make sure all four funds are running in line with the original risk level targets, said Ms. Pao. It identifies the makeup of the risk in the fund, generates an active list of risk by manager and the total active risk of the fund.

The TotalRisk enterprise risk management system includes prepackaged industry standard data and risk models, scalable technology, and parametric simulation and stress testing methods to capture market and credit risks. It monitors investments in real time against established guidelines.

A team from Barra helps clients adapt the software so it generates reports meeting their individual needs, said Sara Somerville, Barra product marketing manager in Berkeley.

"TotalRisk was designed to work within the unique corporate structure of our clients," she said. "For HAPFS, TotalRisk can easily provide a plan-wide view of risk, zoom into each member fund, and analyze risk for each individual manager."

HAPFS can thus monitor each manager's active risk much more readily than in the past, in the context of the scheme's over all risk.

Without TotalRisk, "if we hire a new manager, it would take a couple of years before we could run a standard deviation," said Ms. Pao. "Today, when we hire a new manager, we will be able to see an ex-ante risk number" and catch any deviations more quickly.

TotalRisk also allows HAPFS to do customized analysis of different funds and managers.

"It is a comfortable way to look at the managers," said Ms. Pao.

HAPFS hires specialist managers by region or discipline: It has a Hong Kong equities manager and a Japan equities manager, for example. Each manager has a benchmark and mandate. All 18 managers generally work on all four funds.

The TotalRisk system reports also can be generated as needed. In contrast, master custodian Northern Trust Co., Chicago, only issued quarterly risk monitoring reports, available two months after the quarter ended, Ms. Pao said.

Taking the function in-house allowed the scheme to "drill down and focus on different analyses as and when required," said Bridget So, senior portfolio analyst for HAPFS.

"Further, HAPFS (now) has the capability to back-test possible strategies quickly and analyze the simulation results," she added.

Northern Trust remains master custodian for HAPFS, Ms. Pao emphasized.

Paul Douville, Northern Trust senior vice president in Chicago, said: "We continue to have a great relationship with the Hospital Authority along many dimensions as their custodian."

"Northern Trust can and does provide (a similar risk analysis) service to its clients, and we continue to enhance our capabilities we offer," he added. TotalRisk is one tool Northern Trust uses.

The TotalRisk system isn't a plug-and-play system. Since adding the system in October 2003, Ms. So spends at least 25% of her time managing it. HAPFS also has another analyst who helps run TotalRisk almost full time, said Ms. Pao.

"Barra is a high-maintenance program, (but) if we don't do it ourselves we sometimes don't understand where the sensitivities are," Ms. Pao said. "If you hand it over to a provider who gives you a 10-page report every three months, it doesn't give me much comfort."

The need for a tool like TotalRisk became acute a few years ago, when HAPFS expanded to the four lifestyle funds from one general fund. The general fund was set up more than a decade ago and now covers some 39,000 employees of the authority's head office, as well as the 43 public hospitals or institutions, 47 specialist outpatient clinics and 13 general outpatient clinics it runs. As its members aged, HAPFS officials felt they needed more choices, reflecting different risk profiles. Hence the decision to offer four different funds.

"The Hong Kong public has become more educated about investment funds over the past two years," said Ms. Pao. "The time was probably right to give members more choices."

The Hong Kong government established its own Mandatory Provident Fund for civil servants in December 2000.

HPFS officials look to the allocation of assets in the MPF for guidance on allocating its investments, then adjust the allocations in each HAPFS lifestyle fund according to that fund's risk profile. Members can choose which of the four HAPFS funds matches their needs:

• The growth fund is composed of about 70% equities and 30% fixed income and other classes, including private equity and hedge funds. It has a risk profile of 10% to 11% volatility.

• The balanced fund is roughly 50% equities and 50% fixed income plus other investments, with 8% to 9% volatility.

• The conservative fund has the same makeup of investments as the growth fund, but with different weightings. So, the conservative fund has about 25% in equities, 45% in fixed income, and 30% in cash and other investments including hedge funds The higher cash weighting keeps the conservative fund's volatility at 4% to 5%.

c The capital guaranteed fund's allocation is roughly in line with the balanced fund, but members are guaranteed to at least get their initial investment and contributions back upon maturity. The capital guarantor — an outside investment bank whose name HAPFS didn't wish to disclose — reduces or increases the equity exposure depending on the market's performance. The fund has 8% to 9% volatility.

The balanced fund is the most popular among members, accounting for 39.7% of the scheme's total assets as of the end of September. The growth fund accounts for 28%; the conservative fund, 27.9%; and the capital guarantee fund, only 4.4%.