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Institutional Investment - March 12, 2014

New insights into risk and performance that could lead to major improvements in investment reporting going forward - an interview with Philippe Bourgues

In this month's interview, we speak to Philippe Bourgues, Head of Operational Line – Front Office Solutions, CACEIS, about the research chair at EDHEC-Risk Institute on “New Frontiers in Risk Assessment and Performance Reporting,” and the new EDHEC-Risk Institute publication drawn from the research chair, entitled "Improved Risk Reporting with Factor-Based Diversification Measures."

Philippe Bourgues

Why is CACEIS sponsoring the EDHEC-Risk Institute's research chair on “New Frontiers in Risk Assessment and Performance Reporting”?

Philippe Bourgues: The sponsorship of this new three-year chair, demonstrates CACEIS’s desire to play a central role in the analysis of key developments in the industry. Gaining a fuller understanding of the risk factors to which asset management companies are exposed, enables the Group to enhance its client support by offering optimal servicing solutions.

What is the main aim of this three-year chair and what are the key issues it raises?

Philippe Bourgues: The chair, which is designed to aid institutional investors and asset managers, seeks to explore new concepts in risk assessment and performance reporting as well as new ways of applying those concepts that are currently popular in the investment industry.

The chair will focus on two principal issues. The first is the impact on institutional investors’ and asset managers’ reporting of the increasing shift in ‘conceptual paradigm’ from an asset allocation policy to a risk allocation policy, which is leading to a focus on categories of risk rather than of assets. The second issue covers advances in extreme risk measurement and reporting for funds and institutional investments, with proposals for new risk indicators that enable improved measurement and management of investment risks.

How could EDHEC-Risk Institute’s proposed indicators, which enable improved portfolio risk measurement and diversification, be included in risk and performance reports generated by CACEIS, and which clients stand to benefit?

Philippe Bourgues: According to the EDHEC-Risk Institute’s paper, the two formal measures of portfolio diversification - the Effective Number of Constituents and the Effective Number of Bets - afford asset managers a "predictive view."

In addition to the Value-at-Risk and tracking error, the EDHEC-Risk Institute identifies other forward-looking (ex-ante) indicators which allow asset managers to understand potential risks to which their portfolios may be exposed.

For example, an assessment can be made as to whether there is a correlation between a portfolio’s degree of risk diversification (using a suitable measurement), and its performance through various market conditions. This can be done by analysing correlated constituents to understand how well or poorly diversified a portfolio is.

CACEIS’s massive investment data repository, when combined with the EDHEC-Risk Institute’s powerful statistical analysis techniques, offers new insights into risk and performance that could lead to major improvements in investment reporting going forward.

These indicators could well assist asset managers and institutional investors in selecting funds for any asset class. The process would of course be tailored to suit each specific asset management profile.

About Philippe Bourgues

Philippe Bourgues is Head of Operational Line - Front Office Solutions at CACEIS, having joined the group at the end of 2012.

Graduating from the Institut Supérieur d'Electronique de Paris in 1994, Bourgues started his career with Marine Consulting before joining CPR Asset Management in Paris as Project Manager for Front/Middle Office and Risk Solutions. In 2001 he became Head of Information Systems at CPR Asset Management, then in 2004 he took responsibility for the company’s middle office, reporting, repositories, and project management as Head of Operations. In 2007 he became member of the Executive Committee of CPR Asset Management.