In recent posts, Sean Murray, BISAM’s Director of Product Strategy, has outlined the correlations between investment performance and manager compensation, the tensions of that dynamic, and the related efficiencies that firms can realize from B-One for measuring and reporting manager results. This week Sean and I further discussed his ideas and the Manager Reporting use case for the BISAM B-One Performance and Attribution system. If you’d like to join our discussion, please share your comments at the end of this post.
EA: Sean, when I connect the dots across your recent posts on Manager Performance Results, I see three strong use cases for reconciling overall portfolio performance with fund manager results. For today’s discussion, I’ll tidily summarize those benefits as Compensation, Compliance and Composites. So let’s start with manager compensation – which is the most practical use case. You've previously noted a “striking” operational overlap in investment performance and manager compensation. What did you mean by that?
SM: Both requirements share a need to track managers, analysts, and groups to a fund or portfolio. They both require a long list of metrics and statistics (alpha, beta, turnover, correlation, tracking error, attribution). They both require the aggregation of many funds to form a consolidated view. They both need a dynamic view of funds by Manager, by portfolio characteristic, by security characteristic, or all of the above. Imagine the efficiencies of using a single system. Not only does this simplify the operational processes, but it empowers performance managers and fund managers alike to accurately align performance results with year-end compensation.
EA: I enjoyed following your train of thought from reviewing manager results for the sake of compensation, to looking at the specific requirements that mutual funds must meet when it comes to reporting on manager results for compliance reasons. You specifically mentioned GIPS compliance and – in the case of U.S. Mutual Funds – the SEC-mandated Statement of Additional Information (SAI), which calls for improved disclosure regarding funds’ portfolio managers, including the way in which they are compensated.
SM: Yes. As I noted, the tenets between GIPS and the SAI are the same: to provide a baseline by which investors can understand the foundation of performance, and increase transparency between the investment team and the investor.
EA: And that brings us to the third “C” – composites. Beyond compensation analysis and the above-described disclosures for GIPS and SAI, is it fair to say that there are tangential benefits to mutual funds when it comes to measuring, disclosing and recording all of the above?
SM: Certainly – and not just mutual funds, but asset managers in general. Tying overall portfolio performance with individual manager results allows firms to:
- Provide an ongoing feedback loop to managers to improve and/or maintain high performing investment strategies
- Link long term performance based incentives with higher manager performance: managers with performance based incentives are more aggressive in their quest for alpha…
- Differentiate fund performance by highlighting individual manager results in market composites: imagine the benefit to a fund marketer who can say, “Our fund performance stands out due to a pool of high-performing managers…”
EA: So taking all of the above into consideration, why are so many of our current (and prospective) customers “recreating the wheel” with a variety of systems to reconcile manager results with overall portfolio results, when really everything they need to measure a fund manager’s performance, attribution, and risk is already in their firm’s B-One solution?
SM: Well, I’ve typically seen firms take one of two approaches: either a “Frankensteinian” series of propriety systems - spreadsheets, software, etc., or in-house proprietary systems and databases (e.g. ACCESS) that have to be managed and maintained – which also typically falls to Performance teams. But more and more of our customers are coming to us now to help them leverage something more controllable – all within B-One. This goes back to my earlier “overlap” point. We have and continue to further develop B-One with this in mind.
EA: Thanks Sean. I think that’s a perfect way to wrap things up – and I’m sure you don’t mind me inviting our readers to ping you for advice and suggestions?
SM: Not at all, they can post a comment below or drop me a line via email@example.com for a 1:1 discussion.