Cambridge Associates: Risk Allocation Framework

The most recent step in the evolution of portfolio construction practices has been a shift from an asset allocation–centered process to a more comprehensive risk allocation–based process. Cambridge Associates’ Risk Allocation Framework considers multiple dimensions of risk and return trade-offs when building portfolios and evaluates the consequences of risk allocation decisions during normal and stressed markets.

Yet the problem became that several of these more recently introduced “asset classes” actually have common risk factors that cross “asset class” boundaries. Examples include equity risk in distressed securities and natural resources equities, and illiquidity risk in hedge funds and commingled funds particularly in stressed environments. Thus it became increasingly difficult to recognize, without significant analysis, just how much equity risk (for example) might be embedded in a portfolio that owned lots of assets not named “equities.”

To clarify matters, investors increasingly have constructed portfolios on the basis of the role they expected different kinds of investments to play in the portfolio (i.e., role-in-portfolio exposures), even if they still allocated investments to traditional asset classes.

The Risk Allocation Framework takes this evolution a step further by considering not only the role that different investments might play in the portfolio, but how and in what ways such investments contribute to or mitigate various forms of portfolio risk. The framework combines careful attention to risk allocation in the context of the risk sensitivities and limitations of a long-term investment portfolio (LTIP) given its role in the broader organization. Since risk exposures move over time, we monitor risk allocation and performance attribution dynamically.

IOSCO: Unlocking Africa’s Potential through Competition Policy

African countries have much to gain by encouraging open and competitive markets, particularly as a means to spur sustainable economic growth and alleviate poverty. Yet in reality, many markets have low levels of competition. More than 70% of African countries rank in the bottom half of countries globally on the perceived intensity of local competition and on the existence of fundamentals for market-based competition. Monopolies, duopolies, and oligopolies are relatively prevalent compared to other regions. In more than 40% of African countries, a single operator holds over half the market share in telecommunications and transport sectors.

This lack of competition has drastic costs. Retail prices for 10 key consumer goods – white rice, white flour, butter and milk among them — are at least 24% higher in African cities than in other main cities around the world. While these higher prices affect all consumers, the poor are hit the hardest. A new report from the World Bank Group and the African Competition Forum, Breaking Down Barriers, estimates the gains from tackling anticompetitive practices and reforming policies to enable competition. For instance, reducing the prices of food staples by just 10%, by tackling cartels and improving regulations that limit competition in food markets could lift 500,000 people in Kenya, South Africa, and Zambia out of poverty and save consumers more than $700 million a year.

Cartels – agreements among competitors to fix prices, limit production or rig bids – are a serious cause of low competition levels in African countries and have been found to affect products in a variety of sectors, including fertilizers, food, pharmaceuticals, construction materials, and construction services. Evidence reveals that consumers pay 49 percent more on average when firms enter into these agreements. “There have been a notable number of countries adopting competition laws in Africa, and this bodes well for growth and development. However, while the benefits of competition are already clearly observable in Africa, there is still considerable effort required to ensure effective implementation of competition laws and policies across the continent,” notes Tembinkosi Bonakele, Chairperson of the African Competition Forum headquartered in South Africa.

In addition to explaining the costs of low levels of competition, Breaking Down Barriers highlights the important progress many African countries are making in improving competition policies. For instance, the number of countries and economic communities like EAC, COMESA and ECOWAS with competition laws has nearly tripled in 15 years. There are now 25 functional competition authorities in Africa and budgets for those authorities increased by 39% between 2009 and 2014.

“In the past few years, several countries have stepped up their enforcement capacity and implementation of competition laws. For example, Egypt, Kenya, South Africa and Zambia have taken recent actions to block uncompetitive agreements in a variety of sectors,” explains Martha Martinez Licetti, the report’s co-author and Lead Economist for the Trade & Competitiveness Global Practice at the World Bank Group. “Looking to the future, there is a need to prioritize resources and use the powers and tools available to competition authorities more effectively in order to continue raising the relevance of competition policy within the broader development agenda.”