EUROPEAN INVESTMENT managers lack sufficient knowledge to implement advanced techniques to manage risk, according to a recently published report.
In a report titled A Long Road Ahead for Portfolio Construction: Practitioners’ Views of an EDHEC Survey, the EDHEC Business School in Nice revealed that 95 per cent of industry professionals surveyed agreed that improvements must be made to portfolio construction practices.
An EDHEC European Investment Practices survey carried out last year found that investment managers fail to fully exploit cutting-edge portfolio optimisation techniques, such as the management of extreme risks.
When industry practitioners were asked for feedback as to why this was the case, more than half reported that lack of knowledge in the industry is the main barrier.
One respondent noted that “the advantages and potential pitfalls of portfolio optimisation techniques are understood properly by only a handful of industry participants”. Another practitioner was harsher in his criticism. “There are too many people in our industry who have no interest in constant learning and improving their methodologies. Therefore the funds suffer from several layers of vintage knowledge.”
Another view commonly held by respondents is that investment managers often make decisions on an ad-hoc basis, rather than using quantitative portfolio construction processes.
“Many firms – even those that claim to have consistent asset allocation techniques – implement them arbitrarily or chaotically,” one respondent commented.
Practitioners felt that education of investment management teams and also possibly the education of clients are the steps mostly likely to increase the use of new portfolio techniques.
“Eighty-six per cent of the professionals responding to the questionnaire report that further education and effort on the part of investment managers are highly important means of closing the gap between real-world practice and ivory-tower research,” the report said, “but 79 per cent of these professionals also say that better explanations of the practical applications of academic research are also highly important.”
The report was based on feedback from 57 European investment managers, who were responding to the findings of the EDHEC European Investment Practices Survey 2008. The survey was produced with the support of Newedge, a joint venture between Calyon and Société Générale.
