A group of financial institutions is attempting to standardize the way institutional investors view and manage risk.
GTE Investment Management Corp.; Morgan Stanley, Dean Witter & Co.; and KPMG LLP are among those involved.
The effort, Measurisk.com, is an Internet-based risk service company that seeks to use economies of scale to make high-level risk management more affordable for institutional investors.
The first client -- GTE -- is expected to begin using the system this summer, with others able to sign on by the end of the year.
In addition to offering market risk analysis such as value at risk -- using technology offered by Toronto-based Algorithmics Inc. -- the service will include an analysis of operational, settlement and legal risks, using a questionnaire developed by KPMG LLP, New York.
Company executives are leaning toward using KPMG to develop numerical or some other type of separate rating of those risks and of the overall investment portfolio as part its service.
The service will cost most customers about one basis point a year, according to Measurisk.com Chairman Robert Glauber.
Some in the industry said the company might face an uphill battle in that institutional investors to this point have been hesitant to pay much, even one basis point, for risk-management services.
Getting external money managers to buy into the system as a new standard is key to the service's
ultimate success, suggested one risk consultant.
GTE's role has been to assist in the design of the system from a user's standpoint.
In trying to set a standard for risk management, Measurisk.com is designed to be useful, but in the price range of long-term institutional investors, said T. Britton Harris, president of GTE Investment Management, Stamford, Conn.
"I don't think there's anything out there as comprehensive, yet simple to use (and) cost efficient," he said.
Measurisk.com is different from existing systems or services that
generally rely too much on risk analysis designed for trading banks, which have shorter-term investment horizons and more limited capital than do pension plan sponsors, Mr. Harris said.
GTE hopes to eventually get its in-house staff and external money managers to use the service.
GTE introduced the concept of the Web-based service to most of its external public securities managers in late February to gauge their level of acceptance.
"The response was positive," Mr. Harris said.
GTE wasn't seeking to exclude managers, but wanted to keep the group a manageable size.
Mr. Harris said they invited firms that have made risk management a priority, and those with which it has strategic relationships. He declined to say who attended, but said many were "household" names.
Managers might be attracted to a standardized service, he said. They are being tugged in different risk management directions by clients' varying needs, complicating their own risk management needs.
'No yardstick'
As fiduciaries, plan sponsors and other long-term investors are looking for ways to better manage their risk.
"There's no common framework, no yardstick" for managers and their clients to deal with, Mr. Harris said.
Setting a risk-management standard through something like Measurisk.com would make it easier for both to manage risk using the same terms, he said.
Eventually, if the service is successful, GTE would require all of its external managers to conform to Measurisk.com's type of risk standard, he said.
Getting GTE's external managers to sign on to and help pay for the risk service would be a strong first step in gaining industry acceptance for it, industry experts said.
"I think it's a great idea, (but) who can pay for it, and who will do so?" asked Tanya Styblo Beder, principal with consultant Capital Market Risk Advisors Inc., New York.
Paying big money
Pension plan sponsors already are paying their investment managers big money and are hesitant to shell out more, even for value-added products.
She said that New York-based Bankers Trust Co.'s RAROC 2020 is "a wonderful product" for risk management that once was being offered for about $50,000 a year. Investors with more than $500 million in assets would have been paying less than one basis point, yet the service didn't catch on widely.
Scott Lummer, chief investment officer for 401k Forum, San Francisco, agreed the service sounds valuable, but said the pricing structure might need to change.
Risk analysis with a longer time horizon than is typically provided by bank-oriented systems is needed, he said. And offering it over the Internet simplifies things greatly for both the user and the provider, Mr. Lummer said.
Nonetheless, he said, the one-basis-point fee will be tough to maintain.
"They are trying to wrap what is a fixed-cost service" into a variable-cost fee, he said. "My guess is that type of pricing is going to be uninteresting to larger customers."
Measurisk.com will provide two main services. One will be board-level reporting that will probably include a rating system of the non-market-related riskiness of the investment operation.
The other service will be hands-on risk analysis and reporting, offering both standard and customized reporting of things like value at risk.
The service will offer analysis on a portfolio basis and by aggregating portfolios.
Ron Dembo, president and chief executive of Algorithmics, said Measurisk.com is taking his firm's risk systems and adapting them to the long-term investment world.
"They're packaging it for a particular market; people who we don't normally speak to," Mr. Dembo said. Algorithmics has no pension fund clients, but does have some large money manager clients.
If Measurisk.com does become a standard, GTE's Mr. Harris said, there still will be room for one or more players to offer similar services, based on other sectors of the financial industry.
Mutual funds have two rating services, Morningstar Inc. and Lipper Analytical Services Inc., while there are five major bond credit rating agencies, he said.
A major task of the service is "cleansing the data" from securities custodians into a format that can be used by the Measurisk.com computers, Mr. Glauber said.
"It's neither brain surgery nor is it pleasant, but you need to do it to get it right," he said. The firm's Web site, still under development, is www.measurisk.com.
Others on Web
Measurisk.com won't be the first to use the Web as a tool for managing risk. Both Bankers Trust and State Street Bank & Trust Co., Boston, use the Internet to offer their own risk analyses to custodial clients. The Northern Trust Co., Chicago, offers performance reporting on the Web, and has a service department devoted to managing risk.
In addition to minority-owner Morgan Stanley, the other owners are Bermuda companies XL Capital Ltd. and Bank of Bermuda, and New York companies Micro Modeling Associates and Derivatives Associates. Executives for Morgan Stanley, XL Capital and Bank of Bermuda couldn't be reached or didn't return phone calls.
