Instilling not just risk-management technology but a strong risk-management culture and a process to leverage the technology can enable cash-rich Asian institutional investors to make a generational shift, says Akiyoshi Takeuchi, managing director and head of BlackRock Solutions for Asia.
BlackRock Solutions is a risk-management service provider separate from its affiliate asset management business, BlackRock.
Its business is simple in concept but complex in its ambition: to model each fixed-income security to provide as much understanding about them as possible. For example, with a US mortgage-backed security, it looks at factors including collateral, the underlying borrowers, their geography (down to zip codes), their financial scores, and housing prices. Such is the level of detail required to adequately value a security and measure its cash flows, says BlackRock Solutions.
This service is expensive, but Takeuchi argues that fixed-income investors that lack such a platform are more likely to be stuck with illiquid securities they don't understand, which makes the cost of using a risk-management service worthwhile.
As an additional service to clients, the group is now taking those illiquid securities off investors' hands, and using its risk-management platform to analyse securities and work them out.
Any risk model has not been enough for investors to avoid costly mistakes. "One lesson of this crisis is you can't be too reliant on the science. People forgot to question the model." He says good risk managers challenge the data that risk systems provide, and make a judgment. "You have to assume that scientific models could break down at some point."
Asian investors that take this lesson to heart, and still have the resources to adopt the right systems, stand in a good position to enter new areas of business and investment. Pension funds, sovereign wealth funds and other Asian institutions are still fighting fires, but Takeuchi expects by the second half of the year, those with capital and good risk culture can raise their game. "Asian institutions are in a position to step into the next generation," he says.