Risk assessment rises with market fall

As financial markets grow more volatile and technology more sophisticated, investment managers are using a growing number

Managers in charge of trillions of dollars of pension funds, endowments, and other institutional and private money are tapping into the technology offered by independent companies as well as proprietary systems run by the giant brokerage firms and investment banks.

"There's more interest in risk today because of the volatility in the market averages and stock prices," says Bob Baur, managing director of economics and analytics at Invista Capital Management, an affiliate of Principal Capital in Des Moines, Iowa."Underperformance is being measured against a benchmark. And if you underperform, you want to know why."

The creators of risk management systems have also benefited by the growth of the asset management and finance industry over the past decade with its proliferation of money managers intent on beating their competitiors. And of course the technology-which can now sift through reams of market data at lightening speed-makes it all possible.

Tim Kasta, managing director at KMV, a San Francisco company that can track the default probabilities of public and private companies, says it's not that the old assessment methods-the scouring of financial statements, the meetings with management, the use of agency ratings-have become obsolete.They are just limited.

"And they're inherently backward looking-looking at results of the preceding year," Kasta says. "Quantitative market-based models are better than any individuals can do on their own.You have the collected wisdom of thousands of equity prices."

The company has been fine-tuning and expanding its array of products since its inception in 1989. Its most popular products let users track the default probabilities of public and private companies.

Other independent firms that help investment managers assess the risk of their financial holdings include Measurisk and RiskMetrics in New York City; Barra in Berkeley, California; Algorithmics in Toronto; and Askari, part of Boston-based State Street.

Executives are also using the services developed by many of the giant brokerages and investment banks to monitor the billions of dollars of capital under their care.

Deutsche Bank, for example, sells db RiskOffice (CQ)-the system used to monitor the risks of the $600 billion managed by Deutsche Asset Management-to outside clients.

GE Asset Management uses db RiskOffice and other analytical risk-measuring tools to help manage the $119 billion under its umbrella.

"But we don't use the models to run our investment philosophy. It helps us obtain a feel for the overall risk in our portfolio," says Tim Morris, vice president of risk management at GE Asset management.

Yet even with the most sophisticated and complex computer-driven techniques meant to measure risk, the final decision lies with the skills and experience of the investment manager.

"With the technological tools, you can idenitfy the risk. But it's still up to the manager or company to decide `Is this a bet I'm willing to make?"' Baur says."You have to decide how much risk you're willing to take."