BISAM was pleased to present at last week’s Portfolio Risk and Performance Measurement forum hosted by Financial Research Management. Our presentation focused on integrated performance and risk, and the role technology has played (and continues to play) in shaping the topic. We presented a number of options a firm should consider as they deploy performance and risk technology, and the pros and cons of each option.
Not long ago, the notion of an investor requesting multi factor attribution on their fixed income portfolios was unheard of. To a near lay-person, the concept of explaining the movements of a portfolio sensitive to interest rates was crazy. Multi factor attribution was for the front office, and its value was hampered by the limitations of the solutions at that time - unofficial results driven by lackluster data quality, without the ability to control data sources (outside of what the vendor chose for you).
At the same time, vendors and solutions providers were working hard to convince the industry that one attribution methodology was better than the other. Lehman (then Barclays and finally Bloomberg) had ”Hybrid Attribution,” other vendors provided “Key Rate Duration”, while still others tried to convince the industry they what they needed was ”Custom Attribution.” I’ll let you in on a secret: 90% of the time the same story is told in the same way. The brand name of a methodology is actually a marketing exercise.
I recently saw the movie La La Land, and it got me thinking about the current state of technology in our industry. You’re probably thinking “he’s nuts - how could a blockbuster musical possibly align with technology in our industry?” Easy: the elegance of simplicity.
An article published recently on FT.com detailed the rise in use of ETFs as an alternative to actively managed (or passively managed) Mutual Funds. The piece, ETFs are Eating the Stock Market, notes that the reasons investors choose ETFs over Mutual Funds are well understood, and can be summarized as broad investment allocation across segments with low fees. The article goes on to surmise that ETFs are here to stay, even with a presumed turnaround in active management in 2017. So for those firms selecting ETFs as a quick and easy way to gain exposure to a specific segment, what might be the overall impact on your portfolio, and how can you prepare for the potential of hidden (and unintended) risks?
RIMES hosted their first annual client conference on September 15 in New York City, and invited me to participate on a panel regarding the unification of performance and risk - a topic BISAM has been exploring in some detail throughout 2016. The panel moderated by David Spaulding touched on many of the more practical challenges of this burgeoning topic. In fact, David summarized the dimensions of unification as systematic, organizational and formulaic - essentially the technology, operations, and algorithms that will fuel the continued adoption.
A question from the audience has stuck with me since. What will unification actually look like? What should the industry demand from the solution providers, and what should the solution providers create? Let’s explore.
Fixed Income Attribution solutions are notoriously data hungry, requiring immense amounts of data from many sources to seamlessly decompose portfolio and benchmark returns. Acquiring the data is just one small part of the equation - equally important is integrating, matching, and validating the data - not to mention ensuring the portfolio managers and external customers are happy with the selections. When it comes to choosing data vendors and data tools, the priority has typically been to focus first on selecting a vendor of index and analytics data that could meet the requirements of internal users and customers, and then simply leveraging that vendor’s data tools for a low (or no) fee.
BISAM has long been recognized as a leader in the Fixed Income Attribution space, due in no small part to our early and sharp focus on providing an application that provides consistent results within the firm, but also outside the firm. We have watched our customers embed the results coming from B-One into direct conversations with their clients, marketing literature, client reporting, etc. Through this process, we have realized that our customers’ clients have become more and more educated. Their historical inattention has turned into a keen eye to manager performance as it relates to their fixed income investments. They understand the impact of
It is well known that the GIPS Standards were designed to provide transparency to investors across investment managers - to effectively create an apples-to-apples mechanism for understanding performance and uncovering talent. When GIPS launched, they were a regionally focused set of optional rules that were quickly adopted on a global scale. In short order, they became a competitive advantage to those firms who chose to follow, and allowed investment management firms to attract customers. A formal GIPS Verification process soon followed and helped the cause even further - to engender trust amongst investors in a given firm’s results and help the investor decide to whom their business is awarded.
When speaking with Performance Managers in the BISAM community about challenges in manager performance reporting, we are often told the same story. It goes something like this...
With the recent volatility in the global markets, proving Alpha to your customers has likely taken on a renewed focus. Some clients may be asking how the instability in Asian markets is negatively affecting their portfolio. Others may view volatility as a buying opportunity and want to know how much they have gained since doubling down in Asia. Still others might be questioning their need for active management and asking you for their YTD results vs. their targeted benchmark. In these cases and others, proving alpha to your customers is a vital part of the Performance Analyst’s role within any organization. Just as vital is the ability of your performance application to prove the Alpha you’ve created for both your customers and your internal clients.
As a Performance Analyst, you’re often called upon to provide a wide range of performance results, with detailed explanations when these results don’t meet expectations. With this in mind, does your performance application help you or hinder you?
Topics: Performance & Attribution