Managing drawdown - number one risk issue

At [the] Pioneer Investments April Conference, over 100 professional asset allocators were asked what they considered to be the most important definition of risk. For 34%, the highest proportion, risk meant drawdown; for 26%, the second highest proportion, it was the probability of not meeting return objectives. Similarly, when asked what major gaps they faced in their investment strategy, 39% of the conference attendees said it was managing drawdown effectively while for 34% it was generating sufficient returns. - from Pioneer investment letter

Forget about volatility as the key risk measure. The focus for most is on drawdown. Of course, high volatility may lead to higher drawdowns, but the number one focus is simple - don't lose principal. Investors don't want downside volatility.  Surprisingly, there has not been much talk about tail risk lately. The talk about hedge fund strategies that have better downside protection has also been muted. This needs to change fast.

The second greatest vote was for the risk of not meeting return objectives. For pensions or endowments, not hitting your expected returns has real effects. If your discount rate is 8 percent, a return of only 5 percent will have to be made up in the future. For retirees, not generating enough return on savings may determine whether you can retire or whether you will have to continue to work. 

So the goal for any investment manager is simple. Meet your return objectives and don't lose principal. Clearly, there are few who can do both all of the time, so portfolio construction is critical. There have to be managers who can do either and at different times. There is a need for high performance managers in "good times" and managers who can protect principal in "bad times".  The mix has to be the basis for risk management.