Headmaster Turnbull takes cane to banks

Elizabeth Knight quotes prime minister Malcolm Turnbull speaking at Westpac’s 199th birthday lunch:

Meanwhile Turnbull – himself a former head of the Australian chapter of Goldman Sachs – told those attending the Westpac lunch that bank culture must shift from one that traditionally had been all about profit to one that took into account broader social responsibility.

Remuneration and promotion cannot any longer be based solely on direct financial contribution to the bottom line.

While bank bosses have been talking the same kind of talk for a while now, the growing number of instances where the behaviour of the banks had fallen short as a result of the drive to increase profit (and personal bonuses derived from making returns) are becoming harder to explain away using the excuse of a few bad apples.

“We expect our bankers to have higher standards, we expect them always, rigorously, to put their customers’ interests first – to deal with their depositors and their borrowers, with those they advise and those with whom they transact in precisely the same way they would have them deal with them,” he said.

Turnbull has hit on a key risk area for banks: remuneration structures that reward short-term profit objectives promote a risk-taking culture. Bank deals often look impressive at the start only to sour later. Incentives that encourage employee share purchases align staff interests with those of shareholders — a prudent, long-term outlook — while share options and bonus schemes encourage a short-term focus, aggressive risk-taking and divisional rivalry that can damage long-term value.

APRA may consider remuneration structures as outside their risk management ambit but it is time for a re-think. Toxic management culture is the biggest risk of all.

“Only when the tide goes out do you discover who’s been swimming naked.” ~ Warren Buffett

Source: Headmaster Malcolm Turnbull takes cane to banks leaving Westpac management ginger

The DNA of a diversified portfolio – Managed Funds – Futures Magazine

Before starting, we must define an end goal. Commonly, the initial, singular objective is to maximize performance. This answer is legitimate but raises additional questions.

The first question involves consistency of performance. Certain strategies such as trend-following have desirable risk properties but are intermittent in their returns, while strategies such as option selling may tend to produce consistent returns over most periods but occasionally experience large, sudden draw-downs. Optimizing for performance typically implies that you are optimizing for the average performance over the sample period, but this metric doesn’t account for the year-to-year variability around the average. The importance of consistency depends largely on the time horizons of both the portfolio designer and the investors. Shorter time horizons demand greater consistency of returns.

Another question is that of style, or desired correlation to a benchmark. Alternatively, you may wish to minimize correlation specifically to a particular benchmark. Many portfolio designers seek to replicate the style of trend-followers, yet also improve on the risk-adjusted performance, i.e., they seek “alpha” as well as “beta” (see “Manager lingo,” below). Other portfolios have become popular. For example, an index comprising short-term traders has been developed to reflect a uncorrelated return stream to standard trend-following benchmarks.

Additional and often overlooked objectives include optimizing for various return statistics, including skewness, kurtosis and draw-down measures. Such objectives can be difficult to incorporate into the optimization process accurately. For instance, even though many believe that draw-downs can be bounded a priori and that risk-management methodologies can be separated from the trading program itself, two primary determinants of draw-down magnitude are program style and time. Longer-lived programs generally will have experienced larger peak-to-valley draw-downs, reinforcing the adage: “Your worst draw-down is always ahead of you.” Hence, optimizing for maximum draw-down is an exercise in futility….

via The DNA of a diversified portfolio – Managed Funds – Futures Magazine.