The most shocking news in finance this year!

September 16, 2013 Categories: Investment Strategy

Russell Investments Wire blog - News Flash

Wow, maybe I should know better but I found the results of a recent P&I online poll truly shocking:

Russell Investments Wire blog - Five Year Pie

More than 50% of Institutions are saying they are no better prepared for a crisis than they were five years ago. It was five years ago, last weekend that Lehman filed for Bankruptcy – do you remember the following week? Every one of those following 5 days had an unprecedented event – pick your quote but for me Bernanke’s “If we don’t do this [the federal bailout] we may not have an economy on Monday” captured the mood.

I was working at Lehman five years ago and so I may have more reason than most to remember. However, I am truly shocked than more than half the institutions say they have done nothing since then to prepare for future events – was there nothing to learn? Or is there no reason to worry?

It is inevitable there will be another crisis. I very much hope it’s not as severe but it is possible to make some preparations in advance – and these can help make the impact of any crisis less severe and in particular reduce the time to recover from it.

Emergency services practice extreme events, we ourselves do Fire Drills in the office – all to help prepare for an emergency which we all hope won’t happen but also to dramatically improve the effectiveness of our responses and actions when it happens. Practically speaking it is also possible to do this for a pension fund.

3 actions to take in order to prepare your pension fund for the next financial crisis:

  1. Review strategy and the impact of a crisis:
    • Understanding potential impact from 2008 but also that it will be different next time
    • Review your dependence on Equities and exposures to liability risks & interest rates
    • What are your exposures to liquidity and concentration risks?
    • Understanding your correlation risk: impact of stress conditions on your portfolio particularly if assets become highly correlated
  2. Review operational risks:
    • Counterparty risks & exposure concentrations
    • Exposures to opaque vehicles, implicit and explicit leverage which may force realisations in crisis periods
    • Impact of liquidity shocks
  3. Pre-planning & responsive governance:
    • Review responsiveness of your governance: who is authorised to act if urgent decisions are needed? How quickly can this be determined?
    • Crisis exercise: having reviewed and discussed what actions and responses you and your Investment Committee would make if Lehman II happened this Monday?
    • How would you take advantage of potential opportunities that may arise following a crisis?

Five years after the financial crisis, there is no excuse for having done nothing. Put it on the agenda, get at least one thing done before the end of this year.
Nick Spencer, Regional Alternative Consulting Director, EMEA

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