Buying Into Risk Management

For portfolio managers who think "Risky Business" is Tom Cruise in his briefs lip-synching Bob Seeger, it's time to re-examine their holdings. The buy side is the latest target on Wall Street for an onslaught of sophisticated risk-management tools and, according to a recent report by TowerGroup, the trend is on an upswing. The Framingham, Mass.-based consultancy expects global spending on risk applications to increase by more than 10 percent annually over the next three years, reaching more than $1 billion by 2006.

"There's a quiet revolution occurring in risk management," says Gavin Little-Gill, a senior analyst at TowerGroup and the author of the report. "I'm convinced that we'll see more change in the next two years in risk management than in the last 20 years." Little-Gill attributes the increased scrutiny to a transformation from strategic to active management of portfolios, as well as changes in portfolio valuation against benchmarks.

In addition, the recent rocky markets have brought risk-management to the attention of upper management, points out Eric Greenman, director of New York Life Investment Management's (NYLIM) securities-investment practice. "In difficult years, the effort for risk management really steps up," he says, forcing firms to spend more on risk-management technology. "Once you experience those types of risks, it keeps you focused on it."

Due to the buy side's demand for better tools, combined with evolving technology, investment managers now have a plethora of solutions to help them manage portfolio risk in the front office that incorporate a range of analytics and data, in increasingly user-friendly formats. One tool in which Greenman has seen progress in recent years is Citigroup's Yield Book, a fixed-income analytical system.

While NYLIM has used Yield Book for many years, Greenman notes recent improvements, such as its ability to perform attribution. "When you're looking at your portfolio relative to an index or benchmark, one thing that is helpful to know is, 'Why did you outperform?'" he says. "There's a lot of analytical work involved. Systems that can help you figure that out are very valuable."

The underlying data in risk-management tools is equally valuable, Greenman asserts. The more bonds that a system keeps track of, the more knowledge available to the portfolio manager. In fact, Yield Book's data is one reason that NYLIM uses the tool instead of one from a vendor. "What's good about Yield Book is that ... it's continuing to model more and more bonds as it does more business," he says. In addition, "It allows you to use the same model and speak the same language - you can compare apples to apples." He concedes, however, that Citigroup's tool scores low on usability. And, he adds, many traders and portfolio managers are looking for tools that are easier to use.

TowerGroup's Little-Gill agrees, noting in his report that "Screening and personalizing desktops to provide clean, aggregated and appropriate portfolio and data views for managers will be necessitated by the further integration of risk data into the portfolio-construction process."

No matter what tool a firm uses, though, Greenman predicts that the buy side will continue to see growth in existing products, as well as an injection of new solutions to the marketplace. "With the improvements of technology and resources, they're only going to continue to get better and better," he says.

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Tools For Sale

Some vendors that provide technological tools for the buy side:

For Portfolio Analytics:

Barra (Berkeley, Calif.)

Northfield (Boston)

Wilshire (Santa Monica, Calif.)

For Performance Measurement and Attribution:

FMC (Toronto)

StatPro (London)

Vestek (San Francisco)

For Indices and Data Management:

Thomson (Stamford, Conn.)

Bloomberg (New York)

Reuters (London)

FactSet (Santa Monica, Calif.)

Asset Control (Beetsterzwaa, The Netherlands)

Moody's (Boston)

MSCI (New York)

Source: TowerGroup