Transcript Introduction to Hansa Investment Funds What is risk?

RISK - The only way to achieve the returns
Robert Kitt, PhD
Researcher, Centre for Nonlinear Studies
CEO, Hansa Investment Funds
Risk from different perspectives
• Industrial data – risk is measured with standards
– Mechanical, chemical, electrical and environmental standards
– Zero-tolerance in risk management
• Philosophical data – what is the risk of scientist?
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–
–
–
Not being published?
Not being read?
Not being listened?
Not being cited?
• Historical data – risk is assessed from the past
– Mortality table in the life insurance
Definition of risk
• Risk is the situation of the concious individuals where they are
exposed to the uncertain factors
• Since we cannot be aware of exposure NOR all of the affecting
factors, the risk cannot be generally defined
• One can define and measure only the certain perceived
component of the risk – be it credit quality, volatility, etc
• Therefore, it is worthless to ask wheither any risk metric
measures the risk, but one should ask: is the metric useful?
Types of risks 1/2
•
Market risk – risk, that fluctuations of the financial markets have
negative effect to the value of our investments
– Intrinsic part of any of the investments. There are countless amount of
factors to affect the security price: economic factors, interest rates and
inflation movements, politics etc
– Scale of measurement: standard deviation of returns
•
Business risk – risk, that the issuer of the security is financially not in
good shape
– This type of risk can realize in the drop in share price or decreased dividends
etc.
•
Inflation risk – risk, that the return from investments does not exceed the
(consumer) price inflation
– Historically the bonds have had periods of sub-inflationary returns
– Scale: relative performance
•
Interest rate risk – risk, that the value of the debt security can decrease
because of increasing yields
– Scale: duration
Types of risks 2/2
•
Credit risk – risk, that the borrower cannot fulfill its obligations
– Credit risk stands for both: financial inability and for organizational
unwillingness
– Scale: credit rating
•
Currency risk – risk, that the value of the investment can decrease
because of currency fluctuations
– Scale: standard deviation
•
Political risk – risk, that the value of the investment can decrease
because of the changes political and/or regulatory environment
– Political risk can realize through increased taxes, capital controls, currency
devaluation, revolution etc
– Scale: credit rating
•
Liquidity risk – risk, that investment cannot be sold at reasonable time
for reasonable price
– More “exotic” instruments are more exposed to the liquidity risk. These a re
investments that have only limited amount of supply/demand
How to manage risks?
• Self-education – one has to understand what risks are taken and
also are all of those risks accepted
– Consult with the advisor
Find the right scale for risk assessment
• Diversification – the portfolio of different investments reduces the
importance of single risk factor to the overall portfolio
• Focus on the goals – the shorter investment horizon, the more
important is the market risk (i.e. Fluctuation of the portfolio)
• Think for the future costs – long-term investors bear more market
risk, but they are more exposed to the inflation risk.
• Consider the current income – mostly the bonds offer the
disposable cash flows from the portfolio
How to measure the risks?
• Modern financial theory assumes that the returns of the
securities are independent in time and they are also normally
distributed
• Standard deviation is the statistical measure, that describes the
average deviation (error) from the average empirical result (e.g.
average return)
• Majority of the econometrical models are based on the Gaussian
(normal) distribution, or at some variation of it (e.g. Log-normal
distribution). The risk measurement models are no exceptions:
– Value-at-Risk
– Ex post and ex ante tracking errors
• Econophysics offers more precise measurement tools
– The probability of market crashes by conventional models is zero!
– The memory in time series: multifractal processes
Measurement of risks: standard deviation
Average
Risk
Annual return (st.deviation)
Large Cap
Stocks
12.2%
20.5%
Small Cap
Stocks
16.9%
33.2%
US Treasury
Bonds
5.8%
9.4%
US Treasury
Bills
3.8%
3.2%
Inflation
3.1%
4.4%
Distribution of the returns
Source: Ibbotson Associates, 2003
Standard deviation and normal distribution
Example: Large Cap Stocks
Average return 12.2%
Three-Sigma-Rule: 99.74% of the observations are within three standard deviations
Complex Systems Are Researched in CENS
Departement of Mechanics at IoC
•
Jüri Engelbrecht, PhD, DSc
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Arkadi Berezovski, PhD
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Jaan Kalda, PhD
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Mati Kutser
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Pearu Peterson, PhD
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Arvi Ravasoo, PhD
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Andrus Salupere, PhD
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Tarmo Soomere, DSc
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Anatoli Stulov, PhD
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Marko Vendelin, PhD, Eng
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Olari Ilison, PhD
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Robert Kitt, PhD
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Kalev Rannat
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Maksim Säkki, PhD
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Andres Braunbrück, PhD
Laboratory of Photoelasticity
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Hillar Aben, DSc
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Leo Ainola, DSc
Institute of Cybernetics at
Tallinn University of Technology
Centre for Nonlinear Studies (CENS)
Keywords of CENS
 Mathematics
 Nonlinear dynamical systems
 Physics
 Systems out of equilibrium
 Chemistry
 Biology
 Computer Science
 Economics
…
 Control theory
 Adaptive and self-organizing systems
 Complex dynamical networks of
interacting units
“The whole is more than the sum of the parts”
Aristotle
http://cens.ioc.ee
Hansa Investment Funds:
best porfolio for CEE investors
Asset Management business of Hansabank in the Baltics
• In operation since 1994 – the oldest investment management company
• EUR 2billion assets under management - the largest asset manager
• More than one million clients and 43% market share in pension – the
largest retail client base
Experts in
• Eastern European and Russian financial markets
• Pension fund asset management
Assets Under Management
Bond funds
5%
Institutional
portfolios
10%
Fund of funds
9%
Liquidity funds
7%
Pension funds
31%
Equity funds
38%
Source: Hansa Investment Funds. Data as of December 31, 2007
Hansa Investment Funds serves a diversified group of clients, with each group
representing about 5-40% of total assets under management.
CEE Region in Europe
CEE 11
EU 15
105
385
5.4%
2.8%
14,640
4.0%
29,270
Export growth
10%
4%
FDI (% of GDP) 2004
4.8%
0.7%
Gov. Debt (% of GDP)
31%
65%
Fiscal bal. (% of GDP)
-2.3%
-2.7%
9.8%
7.4%
As of 2006
Population million
GDP growth
GDP per capita, $
CPI
Unemployment rate
Source: EC, Eurostat, IMF
2,1%
Convergence to EU is the key investment theme
Income Levels in CEE Region Are Lower Than in EU15
100%
100%
90%
76%
80%
68%
70%
60%
58%
55%
53%
45%
50%
48%
46%
45%
40%
31%
32%
BUL
ROM
30%
20%
10%
0%
EST
LAT
LIT
CZK
HUN
POL
SLK
SLV
Income levels in CEE (EU15=100%)
Source: Eurostat
CRO
EU15
Equity Funds
Quarter-end AUM
700
Central Asia Equity Fund-48,5 mEUR
Eastern Europe Real Estate Equity Fund -146 mEUR
600
Eastern Europe Equity Fund - 216 mEUR
Russia Equity Fund - 146 mEUR
500
400
300
200
100
0
12/07
09/07
06/07
03/07
12/06
09/06
06/06
03/06
12/05
09/05
06/05
03/05
12/04
09/04
06/04
03/04
12/03
09/03
Hansa Investment Universe
Why CEE and Russian equities are an attractive asset class?
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Central Eastern Europe (CEE ex Russia)
– Convergence process
– CEE economic growth set to outperform rest of EU
– Second wave of enlargement still in progress
– Fast earnings growth coupled with low valuations
– Inefficient markets, many stocks not covered by sell side research
Russia
– Russia’s growth troika: capital, labor, productivity
– Well supported by current oil and other commodity prices
– Emerging sectors besides oil and gas
– Strong economic fundamentals
The Baltics built three-pillar pension systems
Estonian pension reform, introduced during 1997-2002,
was based on the World Bank’s three-pillar approach:
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First Pillar - Pay-As-You-Go system
(payments to pensioners from taxes on current workforce)
Second Pillar - defined contribution plan with individual
accounts managed as pooled funds
Third Pillar - voluntary savings plans to provide additional
retirement income
Latvia and Lithuania developed similar structures
Fund of funds add value
Equities or bonds?
Which region?
Pension funds know-how
Lower costs than if you were
investing on your own
FoF
Fund
selection
When to buy?
When to sell?
Goal: Best portfolio for the Baltic investor!
Pension and fund-of-funds is likely to grow furter
Assets under management
mEUR
4000
3000
2000
1000
0
2005
2006
2007
P2P
2008
P3P
2009
FoF
2010
Private markets in Hansa Investment Funds
We invest in:
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Corporate debt
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Private equity
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Debt securities issued by Baltic companies including bonds, commercial paper and
subordinated debt instruments
Investments in private equity funds
Direct investments in private equity
Real estate
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Real estate funds
Direct property
Recognition
• In November 2007 the activity of Hansa Private Debt Bond Fund was recognised by
Investment & Pensions Europe when Hansa Pension Fund K3 was awarded a theme
award as the Best European Pension Fund in Fixed Income Investment.
• IPE emphasised how the pooled vehicle has stimulated the issuance of debt in the
Baltic countries and made bonds financially more attractive to investors. In addition, its
ability to negotiate the terms of fixed income investments and improvement in reporting
standards and collateral agreements of new bond issues is noticeable.
• Thank you...
References:
• Risk analysis, R. Wilson, Am. J. Phys. 70 (2002) 475-481
• Defining risk, G.A. Holton, Fin. Anal. J. 60 (2002) 19-25
• Theory of financial risks, JP. Bouchaud & M. Potters (Cambridge
UP, Cambridge, 2000)
• Generalized Scale-Invariance in financial time series, Robert Kitt,
Doctoral Thesis, TTÜ, 2005
• http://www.hansa.ee/funds
• http://cens.ioc.ee