Foundations and pension funds are under growing scrutiny as they balance risk management, regulatory demands, and performance goals in an increasingly complex investment landscape. How can they ensure stability, compliance, and the achievement of their long-term financial and ethical objectives? Discover smarter tools and strategies to simplify managing diverse portfolios and tackle these challenges head-on.
In the last couple of years pension funds and foundations have faced increased media scrutiny as an effect of doing very large and sometimes bad investments which have resulted in the question: “Do they really have a functioning risk management in place?”. To answer this question, one must bear in mind that foundations and pension funds operate in a complex environment. They must manage reputational risks, regulatory and fiduciary obligations, liquidity risks, and market volatility - all while aiming to maximize returns. Balancing these demands is not an easy task, and trying to manage everything in a spread sheet only makes it harder. These investors need a platform capable of seamlessly managing diverse assets and multiple asset managers, while providing continuous, up-to-date reviews of all risk and performance metrics.
Risk management involves a range of concepts, practices, and challenges aimed at navigating the uncertainties that can impact the investments. The goal is very simple: minimize losses and keep the portfolio stable despite market fluctuations. This is generally achieved through the following steps:
1. Identifyling the sources of risk: Assessing the origins of potential risks.
2. Make an analysis of the potential risks: Evaluating the impacts and probabilities of these risks.
3. Make informed decisions: Use the analysis to make smart investments.
Effective risk management comes down to principles like diversification and understanding how much risk that can be tolerated. Higher risks often bring the potential for higher returns, but balancing that is key to achieving the long-term goals with minimal risk.
For foundations, maintaining long-term capital and ensuring financial stability are top priorities. In most cases these investors need to have sufficient resources to fulfill the foundation’s mission in both the short and long term, necessitating stable and predictable returns.
Pension funds and foundations are also subject to strict legal requirements. They must adhere to stringent rules regarding asset utilizationand investment strategies. Through risk management, a foundation can ensure that its investments comply with all legal obligations and that potential risks leading to regulatory breaches are considered.
Additionally, many foundations also aim topromote socially and environmentally sustainable values in their investmentactivities. Risk management aids in evaluating and managing ethical risks,including ESG (Environmental, Social, Governance) risks, which could impact the foundation's operations or reputation. Want to dive deeper into ESG? Explore our article: “3 tips for monitoring the sustainability of investment portfolio”.
For foundations and pension funds,developing a robust investment plan is just not a procedural step, it´s afoundational pillar for long-term financial sustainability. The plan requires approval by the board and outlines the asset allocation strategy, defining minimum and maximum weightings for each asset class, sector limits for equity investments, and duration limits for fixed-income investments. Restrictions might also apply to bonds with specific ratings. Establishing precise limits is essential, and they should be updated in line with any changes in the investment strategy.
Most importantly, a well-crafted investmentplan simplifies risk management. It makes it easier to monitor portfolio healthand staying on track with the long-term financial goals.
Most foundations review their investment portfolio’s risk and performance monthly, though some may do so quarterly or annual. A variety of metrics are available for monitoring risks, including volatility, beta, Sharpe ratio, tracking error, Value-at-Risk (VaR), drawdown and duration. Foundations and asset managers often diversify their investments across multiple asset managers, which makes a comprehensive risk monitoring almost impossible due to differing reporting methods between each asset manager. These investors inherent a complexity in their investment structure which is the reason for one platform and one source of truth.
Jay ensures that every single transaction is accurately accounted for through daily reconciliation of investment portfolios across all counterparties. This facilitates clear comparability between different asset managers and allows for precise tracking of risks and returns.
Monitoring allocations is critical from a risk management perspective. Gaining visibility into the entire investment portfolio is vital to ensure adequate diversification. Based on investment limits and allocation objectives, alert thresholds can be established, alleviating the stress about adhering to the parameters of the investment strategy. All of this can then be monitored in Jay’s portal and customizable reports can be produced.
To learn more about how we handle data, check out our article: “The Hidden Risk of Inaccurate Data”
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