TRUST IS GOOD, BUT CONTROL IS BETTER
What is the key to a sustainable excellent performance? This question cannot be answered easily. There are several factors that in combination turn the balance. The appropriate investment strategy, the right portfolio structure and an efficient implementation are such important factors. In addition, an effective control system can make a difference.
However, the latest point is not always on top of the investor’s agenda. Processes in order to protect wealth effectively do not only reduce risk, but also help to improve investment results. It has been shown in a recent study carried out among Swiss pension funds that a sustainable positive correlation exists between returns and risk management1.
Risk cannot be delegated. Only those who know their risks can reduce them. Where are however those typical risks in asset management? The next points are characteristic dangers that need to be avoided:
- The investment strategy is not in line with the Investor’s
- The asset manager does not comply with his guidelines.
- The costs of the asset management are not in line with the market.
- The assets are not enough diversified (cluster risks).
- The investments are not correctly categorised by the custodian (distortion of risk structure).
- The valuation of assets is wrong resp. not accurate.
- Counterparties are not reviewed.
- There is a latent liquidity risk by illiquid assets.
- Basic decisions (for example the asset manager selection or the definition of the investment strategy) are not understandable due to missing documentation.
- From the reporting system, the necessary information for an accurate decision base cannot be derived.
Efficient control systems and seasoned experts recognise such risks in an early stage and enable the investor to understand them and take the necessary counter measures. In order to keep one eye on all risks a comprehensive approach is needed.
The table below shows typical processes that, based on our experience, lead to a reduction of risk: