Dealing with risk management in a proactive way

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Arjan de Boer met with Hubbis to discuss how to deal with risk management in a proactive way.

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1. How do you incorporate risk management within your investment processes?

2. How does risk management impact the KPIs of your product team?

3. Is there any more interest today in managed investments and DPM?

4. Is there any evidence that clients are actually engaging ESG?

Video transcript

1. How do you incorporate risk management within your investment processes?

The way we approach risk management in our entire product suite, whether it's long-term illiquid assets or shorter-term structured products, low risk or high risk, needs to be consistent across time. Whether it is a very bullish or very bearish market, risk management has to work the same way, to ensure consistency over time.

2. How does risk management impact the KPIs of your product team?

Let me give you an example. Obviously, we like our structured products team to come up with creative ideas, and we like our clients to be interested in that, and that's good for the bank. But one of the KPIs is that a very, very high percentage of our structured products, upon expiration, have to be successful. So, they need to have been profitable for the clients, which means that they have to be more conservative in their approach. If we look at our DPM team’s mandates for example, the focus is, on the one hand about performance and obviously the KPI is on the performance of the mandate. But at the same time, it's on volatility within the mandates. So, they need to either perform at par or over-perform their benchmarks. However, they also need to have that performance realised with lower volatility, which is very specific to their KPIs. In terms of private equity, which has a very long term horizon and is a very illiquid asset class, we team up with a very large third-party partner -- the big names, the big global names, purely because of their strong risk management and we can ride on that expertise. In terms of our advice on FX, which is not necessarily a KPI but it has been our view for a long time, this is where we advise clients to have a part of their portfolio in gold simply to mitigate volatility in their entire portfolio. It also acts as an uncorrelated asset within a portfolio.

3. Is there any more interest today in managed investments and DPM?

In general, we've gradually seen over the years an increase in managed investments. When we speak about managed investments or about discretionary portfolio management, we are also talking about discretionary private equity mandates, discretionary managed hedge fund mandates. Advisory is a hybrid between client making the decisions and receiving advice from the bank. And of course, then you have your funds business, which is also a form of managed investments. Across the industry, this has seen steady growth and we have grown along with the industry. Penetration of these managed investments, which are part of our AUM, has increased over the past years. While it is not at the rate experienced by our European counterparts which have very high percentages in managed investments, however, it's definitely becoming quite meaningful.

4. Is there any evidence that clients are actually engaging ESG?

Asia is a little bit late coming to the table when it comes to ESG. Obviously, it's no longer a hobby. It is no longer just fashionable to do ESG. Why? Simply because now, there's evidence that securities with high ESG scores actually have turned in better returns than those that have not. For example, in late January, scores of large global institutional investors wrote a letter to the world's six largest fast food companies telling them, “You have three months to tell us how are you going to make your entire supply chain greener and how you are going to report on that.” This represented trillions of dollars of investments, so clearly those six big companies have no choice but to really look into it and get an action plan ready. If not, the value of the investment in those companies will decline. It is now a matter of supply and demand. If the largest pension funds in the world would have you focusing more on this, and parting ways with non-ESG compliant companies or securities, and investing more in those with high ratings, it will have, and already has had, a significant effect on financial performance. And that clearly is something that clients like.

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