Risk is not volatility; it is the prospect of permanently losing money, not a short term quoted price decline.
Discussing risk in the absence of a time horizon is meaningless. An investor’s time horizon is essential to understanding his or her capacity to handle risk. If you absolutely need to have access to all your money instantaneously, then you have a very low time-risk tolerance and the prospect of a short term quoted price decline is your definition of risk. As such, you should have all your money in treasury bills. If, like most investors, you have a longer-term horizon, you should measure risk (i.e. the chance of losing money) as a decline in unit price, measured over a reasonable period.
So over what time period should decline in unit price be measured? We believe three years is the minimum period over which to evaluate any investment manager since shorter periods can give very misleading results – a manager may be brilliantly building positions in undervalued companies or may be stubbornly pouring good money after bad in overvalued companies. Three years is the point at which one starts to cross over from the ‘voting’ to the ‘weighing’ characteristics of the market; although five to ten years is required for the real shift to occur.
Invespettro recognizes the need for superior capabilities in the listening, identification, assessment, prioritization, management, reporting and monitoring of risk, both at the institutional level and at clients’ investment portfolio level.
We practice risk management within the strategic, operational and financial planning process, and seek to focus on what matters most: risks that may impede business priorities. Regular risk discussions take place across all levels and risks are proactively identified and managed.
We assess investment risk from several perspectives, including liquidity risk; counterparty credit risk, concentration risk; and stress scenario risk.
This function has the unique role of acting as a liaison between our internal investment teams and the investment risk research function. Risk Support facilitates transaction reviews from a risk perspective, performs limit monitoring and helps with asset class modeling, working very closely with the investment teams while still maintaining independence as a risk function.
This team conducts research in the areas of robust risk methods, systems, data and quality; portfolio risk measurement methodology; and policies, frameworks, governing principles and procedures in areas such as benchmarks, performance, investment risk monitoring and measurement, attribution, and risk budgeting. It also provides portfolio construction risk support and model validation, as well as client reporting on investment risks.