How to Kill a Black Swan Remy Briand and David Owyong ...

An Interview
With Susan Mangiero
By Journal of Indexes Editors
The challenges of late-2008
and early-2009 have many
institutional investors looking
to get a better handle on
risk management. Journal of
Indexes contributing editor
Heather Bell caught up with
Susan Mangiero, president of
Pension Governance, Inc., a
research and consulting firm
focused on risk and other
fiduciary concerns related to
benefit plans, to discuss the latest in the field. Dr. Mangiero is
the author of “Risk Mangement for Pensions, Endowments, and
Foundations” (John Wiley & Sons, 2005) and also writes a blog,
Pension Risk Matters (www.pensionriskmatters.com).
Journal of Indexes (JoI): What has the last year done to change
the way pension plans manage risk, and what lessons were
learned in the last year with regard to that?
Dr. Susan Mangiero (Mangiero): First of all, I hope things
have changed. I think it is fair to say that people are adopting
more of a risk focus because of what’s happened. But
whether that’s occurring across all plans and across all plan
sponsors, I’m not convinced.
What are some of the lessons learned? [To take one
example], people are looking at some of the problems
with alternative funds, where people couldn’t redeem out
even if they were contractually allowed to do so. That surprised
quite a few investors. A lot of fund managers—particularly
on the hedge fund side—said, “Well, even though
contractually you’re allowed to redeem, if we allow you
to redeem, it could cause a run on the funds, which could
exacerbate problems; then everybody loses. And so, we’re
just going to forbid you to take your money.”
We know there are some lawsuits, now, against some of the
asset managers that have done that. I don’t know how they’re
going to end up. Redemption rights cannot be ignored.
JoI: What about valuations? Because many of those assets
became very difficult to value when the market seized up last
September.
Mangiero: That is another major area of focus. A lot of the
alternative fund managers, hedge fund managers, private
equity managers, venture capital managers and others have
had to come up with mark-to-market or mark-to-model
numbers. We’ve had quite a few institutions ask questions
about how their asset managers are valuing things.
I think there’s still room for improvement. Some of
the feedback we’ve gotten is worrisome. When we talk
to institutions about what they ought to be doing with
respect to setting up a valuation process, the perception
is often that “it’s too much work, and we’re counting on
the fund-of-fund managers and/or the investment consultants
to handle that.” But we tell people all the time to
make sure that, in fact, the fund-of-fund managers and the
investment consultants are vetting those numbers.
We urge institutional investors to really look deep
and hard at service-provider contracts, to the extent they
can and to the extent that they’re made available for the
institutional investors, just to make sure that somebody is
kicking the tires on models, to make sure that somebody
is checking the integrity of the data, to make sure that
somebody is asking a hedge fund or private equity fund
manager if they’re using an independent third party to
value their hard-to-value positions. That’s a big element
of risk management. We are finding, more and more, that
institutional investors think a lot of that work is being
done somewhere along the service provider food chain.
We’re trying to disabuse them of that notion unless they
verify that for themselves.
I’m not 100 percent convinced it is happening, but
hopefully there is also more focus on monitoring of
collateral and counterparty risks. Most of these overthe-counter
derivative instruments involve collateral.
One of the issues that’s arisen is whether anyone is
monitoring the quality of the collateral. More broadly, is
there enough collateral? The collateral issue also arises
with respect to asset-backed securities. Many of these
instruments have underlying collateral that can quickly
change in value.
JoI: We’ve heard a lot of concern about leverage and a general
de-leveraging across the market. Has that had follow-through in
the institutional community?
22
July/August 2009