Home > News > Regulation > First There Was the Libor Scandal…
Regulation

First There Was the Libor Scandal…

...now the European lending rate is under fire from regulators.

(December 10, 2012) — European Regulators could be about to turn on banks, accusing them of manipulating the Euro Interbank Offered Rate (Euribor) following the scandal that hit the financial world over Libor-fixing earlier this year.

The European Union is set to accuse several banks of attempted collusion in the setting of Euribor, The Wall Street Journal reported this morning citing sources close to a probe into the issue. Libor is the benchmark rate used all over the world to set lending rates between financial institutions, their investors, and clients. There are several local equivalents around the world.

The first bank to publically state it had rigged the Libor rate, Barclays, has already admitted it tried to fix the European rate and regulators on both sides of the Atlantic have been investigating the matter.

Barclays was made to pay a record fine and several of its top brass exited the business as a result. Other banks have been investigated and many expect more fines to follow.

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Numerous investors in these banks, including large US and European pension funds, began examining potential legal action against the firms. More widely, investors that did not hold the affected bank’s stock have looked into how manipulation of the rate to see whether they are entitled to launch legal action.

In July, the chief investment officer of the largest pension plan in the US signalled that his fund could pursue litigation against banks over the alleged manipulation of Libor. Joe Dear, the CIO of the $233 billion California Public Employees’ Retirement System (CalPERS), made the admission at a fund board meeting.

“If we were harmed by specific actions by specific banks, we will seek remedial correction,” Dear said at the meeting, according to Bloomberg. “My hope is that the authorities will review the situation and prosecute where possible those who have done the system harm. It is difficult to underestimate the magnitude of the Libor rate fixing as an episode that fundamentally undermines investors’ confidence in our capital markets.”

However, Jim Grant, publisher of Grant’s Interest Rate Observer, told aiCIO that investors should not be concerned with Libor fixing by banks as interest rates had already been manipulated by financial regulators attempting to solve and stem the damage of the financial crisis. To watch the interview with Grant, click here.

Home > News > Risk > Where Was Risk Best Rewarded in 2012?
Risk

Where Was Risk Best Rewarded in 2012?

We know “high risk” does not always equal “high return”, but where have risk-aware investors been the best compensated in 2012?

(December 10, 2012) — Emerging market currencies and risk parity led the pack of asset classes offering the best risk-adjusted returns in the 12 months to the end of September, research from investment consultant Redington has shown.

The firm used the Sharpe Ratio calculation to show where investors received the best level of compensation for the risk taken on an investment. The higher the number, the better. Over the year-long period, emerging market currencies produced a 20.1% return, but crucially the risk taken to achieve it was relatively low, producing the highest Sharpe Ratio in the range of asset classes measured. It stood at 2.85.

Risk parity strategies produced 20.4% over the 12 month period, Redington reported. While this was a higher overall return rate, the risk taken to achieve it was higher than emerging market currency investments, so the Sharpe Ratio was 2.78.

Last week, attendees at aiCIO’s inaugural Influential Investors Forum in New York City, discussed the importance of managing the risk in their portfolios.

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Jim Dunn, CIO of Wake Forest University Endowment, told the audience that since his arrival at the fund he had earned similar returns as his predecessor, but had massively reduced the risk he had taken in doing so. Dunn said: “You can control two things: fees and risk. You can’t control returns.”

Despite the suggestion that high yield debt was an uncertain bet, investors willing to take the plunge were rewarded over the 12-month period. Redington’s research showed US high yield debt made 15% with the third best Sharpe Ratio of 1.94.

Equities were some of the worst performers, barely compensating investors for taking considerable market risk. Redington found developed market equities made the highest returns with the best Sharpe Ratio – 18.3% and 1.11 respectively – while emerging market equities only made 13.5% and rewarded investors poorly for the level of risk taken (0.68).

David Bennett, Managing Director of Redington’s Investment Consulting team, said: “In the present challenging investment environment, we are finding increasing focus by clients on trying to find more reliable and diversified sources of investment return and an increasing use of risk adjusted returns to help allocate their risk budget between competing opportunities.”

To access the full report with analysis over three and five-year periods, click here.

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