Got Risk?

The basic theme of this issue is one we’ve all become acutely aware of over the last year: risk. Risk of default, risk of a depression, risk of standing on the sidewalk in front of your (former) front yard, shirtless. Over the past year, things we never dreamed could be real risks suddenly became frighteningly real.

The index business has gotten in on the act, reflecting as always, the soaring hopes and then the terrifying fears of investors—all in brutally clear numbers, available for easy reference. When the pendulum shifts toward fear, products that track and help manage risk become popular with investors, and the index industry has been working hard to deliver.

One question that’s been on everyone’s minds recently is, “When it feels like the ‘six sigma’ or ‘black swan’ event has become a near-daily occurrence, what can we do about it?”

An outstanding submission from Remy Briand and David Owyong of MSCI tells you. The article “How To Kill A Black Swan” not only explains how to systematically manage tail risk, but proposes an entirely new methodology for thinking about asset allocation in a risk-managed context.

David Krein of Dow Jones takes a different tack. Krein wonders why, if asset allocation explains 90–100 percent of portfolio risk and return, people spend so little time creating good asset allocation benchmarks. He proposes a set of first principles for building better ones.

Next up is an interview with Susan Mangiero, president of Pension Governance, Inc., and one of the leading pension plan risk management experts in the world, examining the latest thinking on risk mitigation at the institutional level. Gary Gastineau joins in with a practical examination on how investors can minimize the risk of getting scalped when trading ETFs, while Sabrina Callin and Steve Jones of Pimco examine how portable alpha strategies must adapt to the new era of risk.

Rounding out the issue is John Bogle, who issues a broadside against the American financial system and examines the urgent need to embrace fiduciary principles, and David Blitzer, who argues that many of the biggest risks in the market lie with investors themselves.

And don’t forget Dave Nadig, who takes a humorous back page look at how that iconic barometer of market sentiment, the Dow Jones Industrial Average, really picks its constituents.

Risk may not be something we want to focus on during these halcyon days of summer, when we’d rather be thinking about BBQ, apple pie and the Fourth of July. But if last year taught us anything, it’s that risk—and how to manage it—should always be kicking around somewhere in the back of our minds.

Enjoy the summer,

Jim Wiandt
Editor