BISAM’s Summer Intern, Meredith Wade was fortunate enough to have the opportunity to speak with the seasoned PMAR expert, Peter Ellis, a strategic advisor to BISAM. Peter and Meredith discussed the evolution of the Performance Measurement, Attribution and Risk (PMAR) role in the financial services industry, with Peter sharing his reflections on the industry’s past, its growth, and where he sees the industry heading in the future.
Peter’s start in the performance space was a wonderful accident of sorts that has allowed him to become the PMAR connoisseur that he is 20 years later. Peter was assigned to take responsibility of the performance team while he was working at an asset management firm as an operations director. Having limited experience working in the PMAR sphere when he began, one thing became very clear: what the performance team was doing was vital to the firm, however, somehow they were, “stuck out in the garden while everyone else was in the house.”
From that moment on, Peter stayed close to the performance scope of the business to reconcile the perception of the performance measurement function as a crucial component to the front and middle offices. Twenty years ago, investment performance measurement served as a subsidiary activity with which the finance services industry was not terribly concerned. Investment managers did not agonize about their sources of return, about the details of why funds were or were not performing well, and overall they spent little time investigating different insights of their performance. In fact, many investment management firms did not have their own performance team, but worked with an external team who usually performed a very elementary analysis, if any.
Why exactly was the performance team such an inconsequential part of the asset management industry just 20-odd years ago, and more importantly, what caused its eventual ascent? Peter attributes the growth of the PMAR sector to the fact that investment strategies were far less complex than they are today. Twenty years ago investment management was a sleepy part of the financial service industry that tended to invest across similar “plain vanilla” assets: e.g. Bonds and Equities. On the contrary, today investment managers invest in a far more complex set of assets including derivatives and other alternative asset types. Not only is the industry investing in more diverse and complex asset types, but the way these assets are structured and bundled together has become increasingly intricate as well. With the ever-growing complexity of asset management, performance metrics have become more important and more arduous to analyze, and thus performance teams have become progressively more valued and relied upon in the financial sector.
Peter credits another reason that the performance team has seen an immense growth in relevance, size and influence to the burst of the Nineties “.com” bubble, when the world saw an immense increase in volatility in the markets causing panic and uncertainty. As the markets were beginning to stabilize after the burst, the global financial crisis hit, once again causing markets to spin into uncontrolled volatility. This increased unpredictability had a tremendous effect on the role of performance teams across the business sector. After the financial crisis, an immense amount of faith and confidence was lost in the industry. Investors have become steadily more informed and therefore more demanding of their asset managers, pressing them for more transparency and reassurance. However, through the clarity offered by performance reporting, the financial industry is regaining the level of trust that they once held.
Performance teams play much more of an active role in supporting investment teams. While portfolio managers make the decisions and ultimately generate the value, they are unable to do so without the reinforcement of the performance team. The nature of their role has continued to expand while their recognition within the firm has dramatically increased as they have moved from the back-office to a middle-office team working in tandem with the C-suite. In fact, Peter believes that responsibilities of the performance team will only continue to grow. An environment of heightened volatility calls for elevated demands from investors in the form of more, “outcome-oriented” investment strategies in which specific value based targets need to be met. In order to achieve this, investment managers now need to think in terms of defined value based end-goals. In the past, it was always said, “past performance is no guarantee of future success.” Asset managers said they could not discern what was going to happen or provide guarantees about how much money would be earned. Investors are now saying that this is not good enough. Today, it is absolutely key to measure progress towards an investment objective, and thus performance teams have a great duty to fulfill within the infrastructure of Financial Services.
Peter believes that the future holds a much more closely integrated approach to performance and risk. In the past, performance and risk have been kept very separate as risk was overseen by the investment team, whereas performance was measured by the performance team. “We have to get better at where we are at with our measurement of risk and how much exposure there is in our portfolio, you cannot divorce this from measuring investment performance,” Peter notes as he explains the increasing importance of the union of performance and risk.
The future also holds an augment of strategy level performance. At the moment, performance tends to be measured by asset class: equity, bonds, property, etc. However, Peter explains that performance teams should focus more on techniques to measure the performance of the overall strategies that utilize these asset silos. The future of the PMAR sphere is only going to continue to flourish as the importance of measuring performance advances. In a world where volatility is the new normal, it seems that only one thing is clear: we have finally entered the golden age of performance.
Know the Risk. Measure the Reward.
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