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General Systems Risk Management and A-REIT entity performance

General Systems Risk Management and A-REIT entity performance. Simon Huston, Clive Warren, Peter Elliott. Purpose. To investigate General Systems Theory (GST) risk management framework. Academic traditions. Efficient Market Hypothesis Technical analysis Fundamental

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General Systems Risk Management and A-REIT entity performance

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  1. General Systems Risk Management and A-REIT entity performance Simon Huston, Clive Warren, Peter Elliott

  2. Purpose • To investigate General Systems Theory (GST) risk management framework.

  3. Academic traditions • Efficient Market Hypothesis • Technical analysis • Fundamental • Quantitative (financial statements) • Qualitative • Practice Barra Risk Factor Analysis of industry risk, investment themes and entity-specific risk (earnings growth, share turnover and debt rating)

  4. Australian context • Dual economy • mining boom - since 2004 80 % export growth • 10 % foreign students • Xrate destruction of manufacturing • Population surge 1.6m (8%) in 5 year (new dwellings = 155,000 pa) • Concentrated in capital cities (80%) • Affordability • 3% homes affordable for poor households • Ratio of house prices/ income = 4.6 Sources: PCA, COAG 2010, Rismark

  5. Methodology • Develop GST RM model • Benchmark RM of A-REITs using public Web-site info • Calculate volatility-adjusted returns (Treynor ratios). • Asses link between RM score and performance.

  6. Stages • Develop GST-RM framework • Identify the major risks facing A-REIT • Benchmark stated risk mitigation practice in key players • Stockland • Lend Lease Group • Peet Ltd • Mirvac Group • AVJennings Ltd • Link with risk-adjusted performance

  7. GST-RM model

  8. Performance drivers • Strategic positioning • Building portfolio • Product • Location mix • Tenant covenant • Management • Competitiveness • Operational effectiveness • Supply chain optimization • Strategic alliances • Responsiveness to turbulence • Critical capabilities • Leadership and iintegrity • Governance (agency problem) • Core competencies • Project management • Planning insight • Environmental management Market surveillance M. Porter (1996), “What is Strategy”, Harvard Business Review (Nov-Dec), pp 61-78.

  9. Major risks Market • Global • Toxic asset contagion • Commodity prices slump • National • Housing bubble? • Immigration curbs • Foreign investment restrictions • Interest rate increase • Urban • Infrastructure planning (Sydney metro) • Planning bottleneck Entity • Strategic positioning • Major client defaults • Operational effectiveness • Board underperformance/imbalance • Financial statements • Banks withdraw financial support Assets • Unbalanced location portfolio • Unsuitable product mix

  10. RM scores • Stockland 8 • Lend Lease Group 6 • Peet Limited 5 • Mirvac Group 8 • AVJennings Limited5

  11. Risk maps

  12. Treynor ratio mesure de la rentabilité par rapport au risque engagé T = (ki – rf/ β Excess returns wrt market ("alpha“) or risk free asset β = Beta or relative volatility of asset = Cov (i, m)/Var m Caution: high TR can mean an asset with negative returns and a negative (counter-cyclical) beta

  13. Risk adjusted performance • Stockland 21.3 • Lend Lease 7.08 • Peet Group Limited 29.35 • Mirvac Group 20.58 • AVJennings Limited17.48

  14. Comparing best with worst Peet Ltd Lend Lease

  15. Findings • The GST framework directs attention to risks involving • surveillance • flexibility • capacity • controls. • No link (correlation) between publically assessed RM and volatility-moderated returns.

  16. Implications • Displayed RM not sufficient condition for corporate success. • Display of inadequate RM could signal internal deficiencies?

  17. Limitations • Web-sourced corporate information inadequate to properly score RM. • EMH predicts no publically-derived information advantage • Stock prices capitalise quality to maintain a consistent marginal price of risk.

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