Barra, the Berkeley, California-based analytics provider, has begun marketing a new system in Asia for fund managers that it claims is sophisticated enough to enable true comparisons among securities and asset classes to give clients a truer picture of risk.
Unlike competitors such as Wilshire Associates, for example, which provides risk management tools in modules, Barra has adopted a strategy of selling "holistic" systems that are used across an organization. "Any particular user may only be concerned about one part of the system," says Charles Jones, product director for the Enterprise Risk Management system. "But the system can be deployed corporate-wide, to let a portfolio manager look at the aggregate portfolio or just one at a time."
This has created anomalies in the past, however, because the way the global head versus the local manager look at or account for risk can differ. "If the risk factor is not interpreted as the same, those people aren't speaking the same language," Jones says. Barra's new model is designed to eliminate these discrepancies.
Its strategy in essence has been to simply throw more data at the system. For example, the old model could sometimes come up with correlations between asset classes that made little sense in the real world. "We found misleading links between, say, UK breweries and American medical suppliers," says Jones. Another problem was the increasing specialization among fund managers: someone handling a US equities portfolio would interpret data differently than someone running a European equities portfolio, because the inputs would vary.
"We needed the system to be consistent, so we imposed a structure that allows a top-down look: that's the innovation."
Barra augmented the system' s comprehensiveness, for example by adding more countries for its equity and debt models. It has made a particular expansion into credit risk analysis.
"We can now measure counterparty exposures from over-the-counter derivatives trades so the buy side can better manage its exposures," says Oren Cheyette, vice president of fixed-income research and data. "We don't just analyse the term of the bond, but look at the volatility of credit spreads for bonds within a variety of sectors and ratings. The same application measures the volume of credit risk, ratings changes and default risk."
In addition to adding more markets, Barra has made spread models on debentures from Japan, the UK and Europe more "granular", like its US analysis. "In Asia we found building dollar-denominated paper models based on US corporate risk wasn't working," Cheyette says. "Kepco paper will correlate more to the Korea sovereign than to US steel companies. That was another reason to develop local models."
Moreover, the system had to adjust to the fact that in many Asian markets, fixed-income models could not be created using the same assumptions. In the US, for example, Barra would start with government bonds and infer yield curves to model risk. But in Hong Kong, for example, there is no government bond market, and in places like Singapore it's illiquid. So Barra has created other means of building local debt models, based on tracking derivative swap markets, because market makers often base pricing on the swap curve rather than on sovereign yields.
