Economy Shocks Produce Stress Testing Support

December 14, 2009 ( – A new institutional investor survey finds strong support for enterprise-wide stress testing as way to help manage potential large market disruptions such as the one that hit world economies in 2008.

An MSCI Barra news release said its poll found backing for the stress testing notion among both pension plans and asset managers, with one such manager telling pollsters that the procedure “should be like ‘crash-testing for cars’.”

Some 73% of pension plans and 26% of asset managers in the survey do not run stress tests, but the majority of participants promised they would put more focus on stress testing. It is, they said, a critical component for integrating qualitative and quantitative information, enterprise risk management and liquidity and counterparty risk analysis, according to the announcement.

According to the news release, the poll also found:

  • less than one-fifth of corporate pension plans surveyed have a chief risk officer function, compared to 80% of surveyed public plans and 70% of surveyed asset managers.
  • only 40% of asset managers and 18% of pension funds surveyed run stress tests by shocking factors within a factor model. The most common stress tests were macroeconomic shocks (including shocks to currencies, commodities, interest rates, etc.) and market-wide asset class shocks.
  • though all asset managers surveyed invest in multiple asset classes, only a few use the same risk model across asset classes.
  • currently, private real estate, timber, foreign bonds, hedge funds, convertible bonds, structured products, certain derivatives and asset-backed securities are the key assets that survey participants indicated are generally not covered by their risk systems. All pension plans surveyed intend to add coverage for hedge funds, private equity real estate and private equity.

“Although risk management was touted as one of the biggest failures of the crisis, our survey demonstrates that institutional investors recognize the need to invest more in risk management processes: not just in new systems and models, but also in the seniority of risk professionals,” said Remy Briand, managing director and Global Head of Index and Applied Research at MSCI Barra, in the news release. “Many institutions are already redefining the risk function, as risk management becomes more integrated with the investment decision process.”

MSCI Barra interviewed more than 30 of the world’s largest pension plans and asset managers with a combined AUM of more than $4 trillion, including CalPERS, CalSTRS, USS (Universities Superannuation Scheme), AllianceBernstein, F&C Investments, Credit Suisse Asset Management and Pioneer Investments, the news release said.

The report can be ordered from here.