Managing risks in portfolios is prime business of Pankaj Sharma, Executive Vice-President — Business Development and Risk Management, DSP BlackRock Investment Managers.
In-charge of managing risk of the Indian arm of BlackRock a global asset management company (with $4.1 trillion of assets under management and $16 trillion of assets under advice), Sharma outlines the issues involved in managing investment risks in a chat with Business Line .
For fixed income, we do not use many models. We stick to free cash flows and analysis that is ratio-driven. For equity, we use the highly dependable risk models given to us by BlackRock who have their own evolved global risk management systems for their $4.1-trillion AUM and $16 trillion of assets under advice.
How do you assay governance risk issues in investee companies?
In equity you can get out, but for fixed income, investors either take a risk or keep away. Due diligence is very important. We talk to sell-side analysts, rating agencies and are 100 per cent sure before we deploy funds.
What about management quality?
It is more of a judgement call and is based on perception from various people such as raters and brokers. We also do a multi-year analysis of the company where one can spot such issues.
Balance sheet and operating strength vis-a-vis competition is also a handy tool. Based on this, limits on amount of security to be bought and tenor is decided.
How big is your team?
The risk team is six including yours truly. There are two credit analysts and two equity quantitative analysts and two for reporting and compliance which is an operations competence (fund manager guidelines).
Earlier our equity risk analysis was done by BlackRock but we do it now as it has to be continuously done. To build capability, two analysts from rating agencies have been picked up for credit risk.
Your AUM has been range-bound between 2.8 per cent and 4.4 per cent of the industry AUM since FY09. Why?
During this period, money has come into the industry in fixed income — in liquid funds and in accrual-based duration products. Liquid funds are usually corporate treasury-driven, low margin and risky business where you need a critical mass, as investors are well informed. The optimal size for us in liquid funds is ₹10,000 crore.
In the accrual category, we don’t buy a paper if we do not understand the risk inside out. Credit risk in India is high. You have to be married to the paper (only held to maturity). Running an open-ended debt fund is challenging. You need to have a portfolio of securities where you can exit.
We have invested in an ‘A’ rated paper only after obtaining adequate collateral. We follow a very conservative and an extremely cautious approach. For us liquidity is very important.