Industry Challenges in 2016: Harnessing the Old to Make Way for the New

A time for looking back

December is the month in which we reflect back on the year that is almost behind us, and look forward to the one that is almost upon us. It’s a time for objective analysis of the things that we could have done better, and for forming the resolutions that will guide us over the next 12 months.

As you look back at 2015 what would you say are the big challenges and trends in performance and risk that were headline news during the year?

I’m sure that many of you will have different views on this. It will depend on how each of you, in your particular role in your particular organization, was affected by individual challenges and drivers for change.

At the start of this year, I reported on the findings of a global survey in which the following were highlighted as the main challenges facing performance teams:

  • The excessive degree of manual processing.
  • The difficulty providing fixed income attribution.
  • The operational inefficiencies associated with collecting and cleansing source data.

And if I were to collect views from performance and risk professionals on their 2015 retrospective, then I’m confident that I’d find all of the above featuring prominently in the list of challenges (along with the rising cost of index data).

And if we were to broaden the scope of our 2015 perspective beyond performance measurement and analysis, then I’d expect the following to appear high up in the list of industry challenges:

  • The on-going cost of preparing for new regulations.
  • The continuing demand from clients (investors, advisors, distributors, etc.) for an enhanced client experience.

What strikes me about these challenges is that they are from the ‘more of the same’ category. They didn’t appear in 2015, they just became more important or more challenging during the year. And that worries me, because the asset management industry is experiencing a period of significant and unprecedented change. The challenges of the future will not belong to the ‘more of the same’ category.

A time for looking ahead

One of the key industry trends that has been gathering pace over the past few years is the move towards alternative assets. There are a number of reasons for this shift in investment focus, away from traditional equities and bonds towards alternatives, but the main one is the need for more outcome-oriented investment strategies.

Investors of all kinds, individuals and institutions, are no longer content with investment strategies that aim simply to outperform an index while offering little protection against the risk that markets may experience marginal growth or remain flat. Investors want outcome-oriented solutions that aim to deliver a defined outcome while reducing volatility and it is hard to achieve that with investment strategies that feature only traditional assets.

But alternative assets bring new challenges for asset management organizations; it’s not a case of ‘more of the same’. Alternative assets have different characteristics to those of equities and bonds, such as the valuation frequency, that complicate the measurement and analysis of investment performance and risk. Performance and risk teams will not be able to apply the calculation and analytical methods that they have traditionally used.

It worries me that we are still challenged by some of the fundamentals highlighted above, because that means we are probably not in a good position to respond to the new challenges that are coming our way.

For example, a survey published by The Spaulding Group at the start of 2015 found that the use of Excel for performance attribution is increasing. In 2013 21% of organizations said that they were using Excel to calculate attribution, compared with 8% in 2009. That’s clearly a trend in the wrong direction and, if we carry on doing things the way we have been doing them, I am certain that it will not be reversed as asset management organizations make greater use of alternative assets.

A time for a new approach?

I am an optimist and I am positive that asset management organizations will find ways to respond to the new challenges that will emerge over the next 1-2 years. But I would feel happier if I was more confident that the response will be more pro-active than reactive.

Industry Challenges in 2016: Harnessing the Old to Make Way for the NewWhat are your key takeaways from 2015, and your predictions for 2016?

BI-SAM invites you to submit your anonymous comments here. We’ll include a summary of ideas and predictions with the final post of the year on December 29.


Topics: Support & Implementation

Leave a Comment

If you have any comments or have any questions about the subjects raised in this post, please fill in your details and message below. We'd like to hear from you.