Risk strategy: every firm has one. And as technology plays a larger role, and is used to keep up with the latest business trends, upper management is becoming more and more involved. So what does it take to successfully implement and maintain a firm-wide risk strategy? An innovative head of risk management is a good start and a receptive upper management team is another key. At Boston-based Putnam Investments, enterprise-wide risk management is a collaborative effort between the various business departments, and its head of risk management, Erwin Martens. Martens takes pride in his evolving role and the changing face of risk technology.
While some firms are guarded when it comes to their risk strategy and the technologies they have in place, Martens talks openly about what he calls Putnam's "holistic" approach to risk management and the various technology components which form its enterprise-wide risk strategy. Martens, who has an undergraduate degree in computer science and a masters in economics and mathematics, joined Putnam over a year ago from Lehman Brothers, where he headed up the global market risk management group. He jumped right into his role as executor and overseer of firm wide risk efforts at Putnam. Putnam currently manages over $400 billion in assets, across a broad range of investment products such as institutional portfolios; 401(k)s, IRAs and other retirement plans; mutual funds; variable annuities; and alternative investments for institutions and high-net-worth investors.
The "Holistic" Approach
When Martens says a holistic approach to risk management is important for any firm, he is hinting at a trend that is slowly catching on in the financial services industry: making risk management a more integrated part of the larger investment process. Literally, holistic is defined as relating to or concerned with wholes or with complete systems rather than with the analysis of, treatment of, or dissection into parts. In his own words, Martens builds on this definition and describes risk management as a way to add value to the entire investment process, as a way to gather more information on risk and return and use technology to manipulate the information, provide it to the investment professionals and ultimately better manage firm wide risk. "When I say holistic, I mean that risk management shouldn't be seen as an appendage, or something that needs to be done because the regulators say so. It's something that is done because we're interested in managing risk in a better way," explains Martens.
How has Putnam set out to achieve this holistic approach? Martens' first goal was to achieve an enterprise-wide risk management platform for equities, which has recently been completed with the help of BARRA, a strategic technology partner that Putnam has tapped. "We worked together with BARRA to implement a risk platform, or engine, and populate it with data out of our own infrastructure and build a production cycle that populates the database every morning," explains Martens. Putnam was the first buy-side firm to implement BARRA's TotalRisk for Asset Management (TRAM) and worked closely with the vendor to integrate proprietary models with the BARRA tools. "We've taken about an eighty-twenty percent approach, where a large part of the implementation was native to the application, then we added value to specialize or push the boundaries of the application to fit our needs," he adds. To carry out the strategy completely, Putnam is currently in the process of transferring its fixed-income processes from a legacy environment to the BARRA platform in order to achieve "a complete view on a single platform across all of our market exposures for equities, fixed-income and FX," says Martens.
One key result of the TRAM implementation, says Martens, was the access that it provided for Putnam's over 200 investment professionals. "They can see any one of the equity portfolios, any one of its benchmarks and any one of its sub-components all the way down to the asset level," he says. It was also important for the risk system to be readily accessible for upper management as well for retrieval of reports and data. "We have a reporting function built in and because the application lets us look across all of our funds and fund families, we can aggregate in a number of ways that senior management might want to see," notes Martens. "We can aggregate by style group, by risk types, research ratings, a whole host of inputs." Putnam is in discussions with key institutional clients to provide certain risk information out to them in the near future.
While the times and trends may be leaning toward an overall approach to enterprise-wide market and credit risk through a single system, for the time being Putnam is maintaining some separation between the two processes. "As a large institution we have a number of counterparties with whom we trade and we also track issuer risk in terms of the assets that we hold that are issued in the market," explains Martens. For this task, Putnam uses Reuters' Kondor product to analyze counterparties, price assets independently, run scenarios and determine exposures.
"We didn't want to mix the two platforms together because credit is a very granular effort and all open transactions relative to counter parties have to be analyzed," he explains. "So the separation allows us to manipulate data inside the BARRA environment more quickly and readily, whereas with Kondor we have to analyze virtually all of the open transactions, which is quite voluminous." Martens emphasizes that while the processes are run independently, the platforms are integrated to share the same data. "We want to use different engines because they're different problems," he adds. "But that's perfectly okay because the methodology can be controlled in our environment in terms of yielding similar results."