International risk management at Merrill Lynch under John Cummings

¶ … Financial Manager in charge of Risk Management at Merrill Lynch

Who is in charge of international financial management at your company?

The concept of international risk management has become more important at the investment banking firm of Merrill Lynch than ever before, as increased concern and skepticism over business practices have propelled even high-net-worth investors to place wealth preservation, risk management and service as their top investment goals and priorities. ("What Investors Want -- Top Demands Noted in Press Report," 2003) John W. Cummings is senior vice president and chief operating officer of Merrill Lynch's Global Private Client (GPC) branch and is responsible for the Global Risk Management functions of the company. ("John W. Cummings," 2005)

Cummings is responsible for all investment staff, products and processes for equity, fixed income and municipal fixed income assets. He oversees a global risk management team of more than sixty professionals. Overall, Fullerton supports an analytical approach to risk management, that is to say a cautious approach that takes into consideration past market history and one which respects the desire of individual investors to hold onto their assets. ("Special Report Increasing the Odds for Investment Success: Understanding Risk Management," 2005, p. 1)

Can you find any special information on his or her approach?

The risk management process of Cummings is very different from the Merrill Lynch portfolio managers' traditional "bottom-up" fundamental analysis. Cummings believes that risk management must provide an independent "top-down" view of a portfolio that accounts for the relationships among securities, sectors or currencies. Thus, Cummings approach is to ensure that Merrill Lynch's risk management professionals analyze historical performance and other information to identify industry trends and price movements across a variety of financial sectors on a global level, giving portfolio managers important information about how a portfolio has performed as market conditions have changed. ("Special Report Increasing the Odds for Investment Success: Understanding Risk Management," 2005, p.4)

How does the company you selected manage risk?

Merrill Lynch thus understands, and Fullerton agrees that to oversee portfolio management is to be given a great trust. The customer's desire for risk or lack thereof must be respected. Many of Merrill Lynch's institutional clients have explicit risk guidelines for their portfolios. Risk management professionals must first work the firm's portfolio managers to help ensure portfolios are constructed within these parameters in place, and then ensure they are honored. From the company's own liability perspective as well as for the sake of its reputation, individual investors must understand how risk affects their ability to achieve their investment goals and the value of selecting investment solutions. ("Special Report Increasing the Odds for Investment Success: Understanding Risk Management," 2005, p. 1)

At Merrill Lynch, risk is thought of in terms of how different a portfolio's holdings are from those of its benchmark or peer group. The greater the difference between the stocks in the portfolio and the benchmark stocks in the peer group, the greater the risk that the portfolio will perform differently, for better or for worse. To determine this potential disparity, Merrill Lynch uses its risk management team to deploy quantitative models. When portfolio managers have a quantitative understanding of which elements of the portfolio were different from the benchmark and which were not, they can then develop a view as to whether the conditions that caused the performance results would be likely to continue in the future, enabling portfolio managers to manage the risk/return tradeoff inherent in all investment decisions. ("Special Report Increasing the Odds for Investment Success: Understanding Risk Management," 2005, p. 3)

The risk management team also analyzes the individual securities to understand how each holding contributed to the portfolio's absolute performance and to verify that the portfolio's holdings -- both individually and collectively -- remain in line with the portfolio's investment philosophy and objective. "This phase of our risk management process brings two primary benefits to investors: style consistency and truth-in-labeling," and to ensure a minimum of style drift, that is the drift from the investor's original intent, whether risky or conservative. ("Special Report Increasing the Odds for Investment Success: Understanding Risk Management," 2005, p. 1)