Why should risk managers care about investment risk management?
Organisations cannot risk not caring about their investments. All investments, even the bluest of blue chips, carry a degree of risk; and all analysts agree that investment risk can never be eliminated. So the question of whether organisations should care about their investments or not, should not arise. It just makes good sense, and reflects good corporate governance, for a firm’s investments to be researched, tracked, reviewed and revised – closely and consistently. Besides, investments are made using the firm’s resources. Board and Management are therefore accountable and responsible for how these are used, and must demonstrate that they have been utilised with due care.
Firms stand to gain when they manage their investment risks appropriately; the better managed these are, the better their returns. Also, the higher the risk, the higher the returns. But firms need to understand several factors, the first of these being the organisation’s risk appetite. How much loss can it tolerate? What are the major risks that challenge its investments, and how can these be mitigated? These are the questions that demand practical answers; and the answers require an in-depth understanding of the organisation, and identification of its resources and shortfalls, before any investment can happen.
Companies face a whole panoply of risks, many of them beyond their control. Even where to invest is a challenge. They could invest in cash, bonds, property, shares, commodities, cryptocurrencies and other companies. Each of these has a different set of risks. If companies decide to take less risk, they could be missing out on lucrative opportunities – but this has to be balanced out with their level of risk tolerance. Among the many risks that investing companies face are market risk, credit risk, currency risk and inflation risk. The company invested in may lose value due to the economic environment or a decline in its particular industry, or risk incidents that adversely affect it.
This may affect its liquidity, causing it to default on its financial obligations. Or its products may be defective, causing a loss of confidence that affects its reputation and, subsequently, its revenue. Regardless of where an organisation decides to invest – locally or abroad – or what it invests in, it must do its due diligence. Research is imperative, and it has to be consistent, up to date and ongoing. A certain amount of vigilance is also required, and systems within the organisation which can deal with the demands of their investments. Keeping an eye on market developments and being sensitive to the environment are two more factors to bear in mind.
To safeguard their investments organisations should consider diversifying them, i.e., invest in more than one area; and invest over a tenor in line with their investment objectives. Not all investments will give the same returns. Some will do better than others. Like any other organisational activity, investing carries with it a certain element of risk that may affect the company. Therefore, it has to be managed. While the firm may turn to professional investors to manage their assets, the responsibility for this remains ultimately with the Board and Management of the company. Board and Management need to align investment activity with the aims and objectives of the organisation.
They have to be aware that some risks just cannot be mitigated, and can turn the investment into a liability that may adversely affect the company if not properly managed. Another factor to consider is timing, i.e., when to make the investment. Ideally, investors want to “buy low, sell high” but in reality market condition don’t always allow this to happen, hence the need to keep a close and constant eye on the market. Analysts generally agree however that spreading out investments brings in better returns than concentrating them all in one area. Regardless of the method chosen, Board and Management will need to exercise caution, be alert, vigilant and constantly on guard to ensure the safety of their investments.