A recent article in the Financial Times pointed out the key role that analytics now play in the success of Formula 1™ race car teams and drew an interesting comparison with the use of analytics in investment management1.The article described the feedback loops whereby information about the performance of F1 cars is collected during each race from some 200 sensors in each car. This data is then analyzed to improve the car's performance in the next race.
The feedback from the performance analytics allows F1 teams to see what is working and what isn’t, and then make the appropriate adjustments to the car before the next race. The parallel with investment management is obvious. Performance analytics can be used to collect information about which investment decisions delivered value, and which ones didn’t. And that insight can then be used to improve performance, to make more successful investment decisions and fewer bad ones. But as the FT article points out, many investment management firms are a long way behind the curve when it comes to effectively utilizing performance analytics across their middle and front office teams to enhance investment decision making.
Investment strategies are becoming more complex as investment objectives become more focused on achieving an absolute goal, and less on beating an index-based benchmark. Investors have worked out that there’s not much comfort in being told that your fund has beaten an index in a falling market. As investment strategies become more complex, the need for performance analytics feedback to enhance investment performance will become increasingly more important.But in investment management it isn't just about enhancing performance; being able to explain how performance was achieved is just as important. A recent research report highlighted the top two differentiators for investment managers2:
- Quality of customer service & relationship management.
- Investment Strategies
It’s not a coincidence that these came out on top. They are connected.
Managers need investment strategies that will deliver investment performance in the way that investors want it delivered. But they must also be able to explain how their strategies are actually delivering performance. One of the key objectives of customer service and relationship management is to provide investors with information about their funds and about how they are performing. Managers have to be able to demonstrate where their investment processes are adding value in order to show that it is their active decision-making that is creating value. In other words, managers have to be able to show that in their approach to investment management, nothing is left to chance.
Without performance analytics, managers cannot identify where their investment processes are adding value and where they are losing it. And if they can't do this then not only will it be harder to enhance or even sustain performance, they will not be able to demonstrate to their clients that they are delivering alpha via active management.But is it actually fair to say that investment managers are behind the curve in the use of performance analytics feedback? Well, it's probably not true in all managers, but ask yourself a few general questions:
- How many performance analysts play an active role in investment strategy reviews?
- How many Heads of Performance or similar roles progress to the C-suite in the way that Heads of IT and Heads of Operations make it?
- And how much investment goes into new performance systems, compared to the systems used in other areas?
Performance analysts don’t always help themselves in these areas. They tend to focus too much on the mechanics of calculating and analyzing investment performance, and not enough on how the analytics can identify good and bad investment decisions in order to 1) enhance performance over time and 2) demonstrate to clients how firms are delivering value in return for the fees they pay.
To achieve this, performance information needs to be accessible to everyone within an investment management business who is involved in delivering value to clients or in servicing and managing client relationships. And it has to be easy to understand, with the presentation format customized to meet the needs of different individuals with different levels of knowledge of how investment processes work. You shouldn’t need a CFA or a CIPM qualification to be able to understand an explanation of where an investment strategy is and isn’t working. You might need them in order to provide the explanation, but that’s a different matter.
So what’s holding back investment managers from getting to the same levels of performance improvement as, say, F1 teams? It should not be a matter of technology or resources any longer. Specialist performance solutions exist and can provide the analytics that are needed to enhance investment performance. They feature data visualization techniques and dynamic user interfaces to allow performance information to be presented in the right way for everyone who needs to see it and understand it, including the investors themselves. Further, firms don’t require functions and resources dedicated to performance analysis to benefit from a sophisticated solution intended for performance measurement. There are solutions available to investment management firms of all shapes and sizes that help managers to deliver better performance, regardless of how many resources and how much budget is dedicated to performance measurement.
So perhaps it’s just a matter of changing the mind-set amongst investment management firms to understand the value of performance analytics feedback and its power to help the entire firm to perform better.