Last week I facilitated a roundtable forum in Amsterdam that was sponsored by BISAM. We had a good cross-section of the Netherlands asset management community at the forum to discuss current trends and market practices in performance and risk. We had a very good, lively discussion and a number of very interesting points were raised. In this blog post I highlight two of those discussion points: challenges facing performance teams and the trend towards consolidation of performance and risk systems.
Challenges facing performance teamsAt the forum we identified the following as significant challenges facing performance teams:
- The provision of high-integrity source data.
- Maintaining a quality service as business volumes increase.
- Coping with the need to support regulatory change, new instruments and asset classes, and new products.
The consensus reached in the discussion was that these are three of the main causes for the excessive amount of manual processing that performance teams are required to carry out.
When looked at from one perspective, given all the significant advances in technology that have taken place over the past 15 years, it is disappointing that the degree of manual processing carried out by many performance teams is still perceived as a major challenge. However, when looked at from another perspective most teams are coping with much more complex processes than they did 15 years ago. The range, volume and detail of performance and risk analytics that teams are required to produce today are all much greater than they used to be, and teams are expected to calculate them more often and deliver them sooner.
I am completely convinced that advances in system technology have delivered significant benefits to performance teams over the past 15 years. Superficially, the challenges identified in last week’s forum might look like the same challenges that teams were facing 15 years ago, but the context is very, very different. If asset management organizations had not upgraded their systems over the past 15 years, their performance teams would still be struggling to produce basic, high-level analytics on a monthly basis.
One of the key points that emerged for me from last week’s roundtable is that asset management organizations are moving into a new phase in which the demands placed on their performance teams are once again increasing. Investors want more sophisticated analytics to be provided for more sophisticated investment strategies. This is the main reason for the high levels of manual processing that we currently find inside many performance teams. Organizations that fail to ensure that the capability of their performance and risk systems remains aligned with the demands of their investment teams and their clients, will experience increasing operating costs, a higher risk of client dissatisfaction and, ultimately, a reduction in the effectiveness of their investment processes.
We didn’t just throw people at the basic challenges we faced in performance 15 years ago. Doing so was not the right solution then, and it certainly isn’t the right solution now.
Consolidation of performance and risk systems
Another interesting discussion at the forum was on the subject of performance and risk systems. This was prompted by a short presentation of some research I completed recently into market practices around the same topic.
This research found that only 4% of asset management organizations (managers and asset owners) currently use the same system for performance, ex-post risk and ex-ante risk, and 50% use a different system for each. However, 39% of organizations are expecting to change their system configuration at some point in the next three years, and 30% of them expect to move to a single system.
The main focus of the discussion at the forum was on the motivation behind this trend towards system consolidation. Both performance and ex-post risk are concerned with analyzing how investment strategies have performed and why they have performed like that. So it is not too surprising to discover that performance and risk teams would like to converge on a single system for performance and ex-post risk.
Ex-ante analysis is concerned with trying to deliver an acceptable level of future performance at an acceptable level of future risk. Ex-ante risk analysis has, historically, been the province of investment teams. So, what is the motivation for performance teams to move towards a single system for performance, ex-post risk and ex-ante risk?
The view that emerged from the roundtable discussion was that the driver for change here is the need for higher levels of governance over ex-ante analysis. Performance teams have long provided independent analysis of the value that has been delivered by investment processes. This governance role is now being extended to independent analysis of the value that will be delivered.
If you had looked inside asset management organizations 15 years ago, you would have found a collection of different performance systems: one system for calculating returns, another for equity attribution, and another again for fixed income attribution. Over the past 15 years, many asset management organizations replaced their fragmented performance system platform with an integrated, single one, and in doing so delivered significant benefits to their businesses.
We have now reached the next phase of system consolidation. We are moving into a period of consolidation of performance and risk systems. Those asset management organizations that move in this direction can expect further significant benefits to be delivered.
What about those who don’t? Well, let’s just say that I’m not going to be handing out any prizes for getting the answer to that question right.