Main menu


Fostering a risk culture

featured image

A Culture of Risk and a Culture of Opportunity: When things are looking good, it’s all about seizing opportunities. When things go downhill like they do now, our attention turns to risk. That’s how things go. But you shouldn’t. We must always develop and operate within a risk culture.

For five years, I was Chief Risk Officer and CIO of the University of California Pension Fund, Jagdeep Bachher, and I embarked on a program to build a risk culture. Risk management went hand in hand with looking for opportunities. In fact, one of the annual reports can be opened two ways. On one side of the cover of the annual report was Opportunity. When the report is flipped over, the opposite cover has “Risk” and the text is reversed.

Annuities work to meet personal financial goals. For the University of California, over 250,000 individuals and he has a portfolio of over $150 billion. into one. Here, we discuss what risk culture is and how to incorporate it into portfolio design and investment decisions.

Risk culture is human
Risk is not a number, it’s a story, the story that weaves together our clients’ portfolios and goals. Quantitative measurement is the end for those looking at one dimension of earnings, but individuals are multifaceted, building a foundation for financial security, maintaining a lifestyle until retirement, and perhaps ambitious You have a purpose in life such as reaching a goal.

Risk culture has a common language
The foundation of culture is a common language, a shared way of communicating. So, as a starting point, risk culture means creating a common language for measuring and evaluating risk. The standard term for risk is risk factor. They walk through the various assets in your portfolio and represent risk in a concise and intuitive way. More than 90% of a portfolio’s non-specific risk can often be explained by just a handful of risk factors, even when the portfolio contains hundreds of assets.

And the same language means sharing the same risk applications and metrics from CIOs to advisors to clients. And do this beyond the risk application. Having the same data, the data tags and schema extend from the core performance reporting system to the applications that feed that data.

Talking the same about risk means more than reciting the same numbers. We share the story of risk and our understanding of how risk evolves and permeates to influence our clients’ portfolios and life decisions. Example: I work as a Chief Risk Officer at many financial institutions, and when a risk issue arises (it doesn’t have to be a crisis), I sit at the table with the CEO, CIO, and management. I was sitting the head of the commercial zone. We have a risk report for reference, but our discussion ended up telling a story about how things might evolve, a what-if. One person may complete another person’s sentence or embellish the story based on another perspective on the market or experience.

Risk culture is active
Culture is active. To be important, you have to take action. Without action, it might be better defined as a risk ritual. When designing or changing portfolios or considering new investments, the question of risk is paramount. For portfolio design, this means looking at the portfolio in terms of risk factor exposures, looking at the marginal effects of incremental changes, and looking at exposures to sectors, countries, and investment styles. A risk factor is essential for this. This is because the risks are not always evident when looking at each asset. Amazon is primarily a retailer, but its revenue from cloud services puts a strain on the technology risk factor. Speaking of cloud services, let’s look at another example from Equinix. Although it is a sub-industry real estate company specializing in REITS, its main business is the operation of data centers.

For a private equity or real estate deal, that means looking at how it fits in the overall portfolio rather than the risks and opportunities in isolation. For example, UC considered buying an office building near the Stanford University campus and asked how rental income would be affected by the downturn in technology and how it would interact with the stress on college tuition. We examined whether it correlates with

Risk culture is dynamic
I think of risk in the context of culture, just as culture is the essence of our human condition and risk is also human. We learn from experience, innovate and create. Our tastes, living circumstances and interests in various investment objectives change. For example, a client with a young family who is struggling to accumulate savings will have different concerns about security. And this has to be central to how we look at risk, especially those that are important to an individual’s longer time frame.