We use risk budgeting to allocate risk across the fund’s asset classes and active investment programs.
Board members have approved a Risk Appetite Statement for Investments (80 KB PDF) that underlines how risk consciousness begins at the top of the organization. The Statement outlines the plan's tolerance for various types of risk and is integrated into the Board's Investment Policy and the Enterprise Risk Management process that guides business decisions, reporting and day-to-day activities.
Our investment managers are limited in terms of how much active risk they can take in order to generate returns. They must be as concerned about the potential for loss from an investment as they are about how much might be earned.
The largest active risk budgets are in private equity, public equities and real estate. These assets have earned significant returns above their benchmarks over time.
The risk budget is presented annually to board members for their review and approval. Board members also approve the policy asset mix.
Monitoring risk
We monitor and report the observed risk values against those budgeted. We monitor risk at both the portfolio and total-fund level. We constantly revisit our estimates and assumptions and monitor risk on an ongoing basis.
Our robust risk management systems provide a coordinated view of total fund risk and its components. They include an asset-liability model that can examine and compare a wide range of long-term economic forecasts, funding scenarios and investment strategies, and a risk system that uses a statistical framework to measure market and credit risk.