Focus on risk management – Union Investment puts people in focus when modelling risk

Union Investments’ risk management conference in central Germany in November was predictably crowded. At few times in recent history have investors focused so closely on ‘risk’ as they have since the sub-prime and debt crises.

Hundreds of clients of the German asset manager had turned up for a full day’s discussion on one of the most pressing themes in asset management – risk and how to manage it.

If the delegates in Mainz hoped they would be told exactly how to use and interpret risk management models, they were partly disappointed.

That is because risk management experts, both from Union Investment and academia, were quick to point out that human (qualitative) understanding of the investment climate is important; that people must understand the limits of risk modelling, not just its strengths; and that sometimes “common sense” was needed more than statistics.

They said increasingly, attention would be focused on “the potential failings of models, and an understanding you do not need to believe everything a model produces”.

Professor Daniel Rösch from the institute of banking and finance at the Gottfried Wilhelm Leibniz University Hannover, said the intelligent use of risk models linked to regulatory guidelines could help institutions save on capital they had to reserve, but he added: “There are limits and challenges we have to identify, in order to adjust risk models to practical needs. The risk model can be a risk itself, if it cannot represent the key facts of reality.”

Jens Wilhelm, member of the board of managing directors at Union Investment responsible for investment strategy, said it was non-investment risk, poorly covered by many models, that remains the biggest threat to Europe’s domestic markets. “Analysing companies is not a problem, analysing countries is harder, and it is hardest to analyse politicians, their power and their mentalities.

“Politicians are the biggest risk on the way out of the Eurozone crisis, and as long as we have not achieved a critical level, you always have to be afraid of negative developments.”

Wilhelm said when historians came to reflect on 2012 it would be viewed as “quite a good year, with the Dax and US shares rising by over 20%. Markets learned to relax as the ECB eliminated the tail risk of the bloc collapsing, “but that has been priced in, the question is will it continue?



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