Pankaj Sharma, Executive Vice President - Head of Business Development & Risk Management at DSP BlackRock Investment Managers provides an insightful perspective on the risk management practices followed by DSPBlackRock (DSPBR) and its benefits to investors in a two part interview with Cafemutual.
How
does risk management benefit investors?
When things are going good, no one talks about risk management. When things turn bad then people wake up. Risk management is at the heart of every AMC’s operations. You need a risk manager even during good times. Risk management teams should be independent so that their risk assessment is objective. Interestingly, BlackRock’s early focus was risk solutions.
In India investors only look at return vis-a-vis other funds. No one looks at the embedded risk. The concept of risk adjusted return is still nascent in India - only advisors and third party fund evaluators have been talking about this. However, this is now improving.
Tell us how does risk management benefit fund houses? What does risk management entail?
When asked to set up a risk management team, I posed the question to my seniors whether they wanted a risk manager just to demonstrate the presence of a risk management department or whether they really wanted an effective risk management team – one that had teeth.
The answer was the latter. I was told that the team has to assess and manage risks since the brand equity of the franchise was enormously dependent on effective management of risk. For example, investment underperformance over a long period of time or improper adherence to regulations translates into reputational risk. There is no tolerance for event driven or individual driven action at DSP BlackRock that could lead to reputation risk.
DSP BlackRock accords great importance to the risk management function. Both, at BlackRock and at DSP BlackRock, risk management is very crucial. I had attended a conference organised by BlackRock for their platinum clients in Istanbul in 2006 where BlackRock Chairman & CEO, Larry Fink said that BlackRock’s business is risk management.
We see ourselves not as stock selectors or sector allocators. We see ourselves as someone presenting a different perspective to the portfolio managers. For example, we could tell portfolio managers. that these are your top 10 risk positions and this is the likely impact of such positions under various market conditions.
You cannot say that risk is bad. You have to be able to evaluate the risk so that there’s a greater upside than downside. In this context if the risk team does not have the independence or the requisite skill-set and mind-set, then risk management becomes ineffective.
Do you get into disagreements with fund managers? How do resolve them?
We have internal fund manager guidelines, which are reviewed at monthly meetings. Disagreements are possible. However, if this is the outcome of healthy and objective discussions, then it strengthens the process and leads to purposeful action that seeks to address risk issues. We also present an independent view on the portfolio created by fund managers. Our role is to help the portfolio management team to better assess and manage risks.
Tell us about your risk management process on the fixed income side.
On the fixed income side, we focus on the credit risk process. Assumption of interest rate risk is the responsibility of the fund manager. The risk and quantitative analysis team defines the credit risk limits. The last three years have been interesting. We have to make sure that the investor’s interests are protected. Fortunately, we have not had any credit issues in our portfolios so far.
We have a list of approved issuers for whom we have set tenure and asset exposure limits. Our fund managers can only buy papers up to the credit limit approved by us. Any new issuer or company has to be approved by the credit committee and then only the fund manager can invest in that particular company’s paper.
In applying too many risk management rules/filters, what are the chances that it will impact investment returns? How do you strike a balance?
We don’t impose any restrictions on portfolio construction. Risk management is not about numerous conditions or constraints or filters that hamper portfolio management. It is about creating a robust process that is followed in a disciplined manner by both the fund manager and the risk manager. The risk management output (i.e. risk reports) should be evaluated objectively and thereafter, corrective action, if any, should be taken in a time-bound and purposeful manner.
