Whereas it was the case in previous years that your best chance of trying to make up for any shortfall was to take a bit of investment risk, that strategy would come under quite a lot of scrutiny by the regula- tor and they would probably stop it. Bart-Williams: Scenario testing and statistical stress analyses are important. Sometimes you get con- sequential risk. For example, if you use derivatives to hedge some of your risk then there might be a collateral call on that.


Having a plan for collateral and not parking that in assets that are volatile and market-sensitive is a sen- sible thing to do to diversify that risk, otherwise your collateral pool is getting depleted at precisely the time you need it. Drewienkiewicz: This is about holistic risk management. That is what the regulator has been pushing hard on.


Bart-Williams: It is certainly something that they should plan for. I’m not saying sit in cash, but it’s useful to have a waterfall so if you need collateral you can get it. Then you make sure that those assets in which you park your collateral are ideally market neutral, certainly close to duration neutral, so you don’t have significant interest rate and inflation sensitivity in those assets. Typically, it is your interest rate and inflation hedges that might need collateral at a certain point in time. So it is important to have a plan for collateral.


PI: Could volatility force a move back to active management? Booth: Over the past year or so there’s been a lot of commentary suggesting that we are heading towards an environment where active management will come into its own. I don’t know whether that’s right and only time will tell. Intuitively, it feels like there could be opportunities to identify some underap- preciated value, but the pressure on active managers will only increase if that doesn’t turn out to be true. Drewienkiewicz: I have seen studies that support this thesis and studies that debunk it, so I’m not convinced there’s any significantly clear evidence that active managers do better in more volatile times.


16 April 2019 portfolio institutional roundtable: Managing volatility


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