General Systems Risk Management and A-REIT entity performance

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.

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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

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GST-RM model
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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.
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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

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RM scores

• Stockland 8
• Lend Lease Group 6
• Peet Limited 5
• Mirvac Group 8
• AVJennings Limited5

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Risk maps
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Treynor ratio

• mesure de la rentabilité par rapport au risque
  engagé
• T (ki rf/ ß
• Excess returns wrt market ("alpha) or risk free
  asset
• ß 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

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Comparing best with worst
Peet Ltd
Lend Lease
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Findings

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

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Implications

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

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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.