IMAS highlights liquidity risks in new guidelines for investment managers

THE Investment Management Association of Singapore (IMAS) on Monday highlighted liquidity risks for investors, as part of its new guidelines for risk and performance analysis for investment managers in Singapore.

"The financial crisis and, more recently, volatility in certain markets such as China and some areas of the bond market has reminded investors that liquidity can be a 'hidden risk' in a portfolio," said Trevor Persaud, chairman of the IMAS's risk and performance committee (RPC), in a media statement.

"It is recommended that investors estimate and monitor portfolio liquidity - the capacity to meet outflows, and position liquidity - as it relates to actual allocations within the portfolio, even though this may be a time consuming exercise to undertake systematically."

IMAS said it is the first industry association globally to launch best practice guidelines to help investment management firms structure and manage both risk and performance analysis functions. The guidelines were developed by IMAS's RPC, which includes representatives from large investment managers and financial institutions in Singapore.

"The RPC found in consultation with its members that there are significant variances in how risk management and portfolio analysis functions operate. These guidelines set out the key areas of focus and best practices in measuring risk and performance, and we hope they will be useful to investment managers whether they are large international firms or small local boutique firms." said Mr Persaud.

The key principles under the guidelines include:

Governance of risk and performance units should be independent of the investment function;

Independent measurement and monitoring of investment risk;

Portfolios should be subjected to regular scenario analysis and stress testing, including non-return based measures such as liquidity;

Risk models should be independently validated, and back-tested.

IMAS represents more than 100 investment managers with assets under management (AUM) in Singapore exceeding S$800 billion.