Using risk and performance attribution data together to gain better visibility is no new thing - it has been on the agenda since before even the global financial crisis.
But until recently, technology has simply not allowed for a single source of performance and risk analysis to be displayed in an easily readable format and in a timely manner.
This has now changed.
With scalable cloud-based systems, asset managers can now pull the data from a single source, apply the analytics and then push that data back to the user’s desktop. The user can then decide how they see that data (visually or as data), at what frequency (daily) and in how much detail.
Citisoft’s 2016 Outlook Report identified this: “Looking ahead… our money is on the continued transformation of data-driven solutions across the asset management lifecycle, and a continued convergence of the front and middle office.”
This is a huge advance on pulling in data from disparate sources and manually trying to align it to see a meaningful end picture. Until recently, the middle office teams found themselves comparing apples with pears. Attempts to align performance attribution and risk data involved so many variables and data sources that seeing them as a part of a bigger picture was pretty much impossible.
Citisoft reviews the change this way:
“Front-office risk management systems are now front and center in the minds of chief investment officers, portfolio managers and analysts as they look for ways to understand aggregated risk across all of their investments and portfolios. Additionally, changes in how managers want to analyze markets and construct portfolios will begin driving firms to seek more integrated and robust solutions.”
The cloud will be a big enabler for boutique managers
Smaller asset management firms are at both an advantage and a disadvantage to their larger competitors.
On the one hand, they are less likely to be running multiple legacy systems with siloed data sets deeply embedded. On the other, they are less able to devote resource - both financial and human - to join up the dots of risk and performance.
The latest Bob's guide to risk systems management describes this as ‘internal fragmentation’, leading to risk management being ‘heavily soiled’ with different systems and an inability to see a snapshot of risk via an integrated system. However, the cloud presents a real opportunity for change, the authors claim. If boutiques have a cleaner data and system set to start with, then the lift out is also easier onto a single data source platform within the cloud.
PwC identifies the advantages of an integrated approach in its 2009 Managing Risk and Performance paper, which still has strong currency today:
“Integrated risk and performance management can help companies: Quantify risk appetite and tolerance, identify potential risks across the business portfolio, assess risks to performance goals… and align financial incentives for risk taking with potential outcomes.”
For smaller firms with less margin of error, being able to steer the correct course and have the data and analytics to frame a narrative for existing and potential investors is essential. These managers cannot afford for things to go badly wrong in the first place - they need to know their risk limits. They also need to be able to see what happened and why and be able to underscore this with hard facts (attribution). Telling the story is an important way to add value to investors.
Mark Zandt, Global Services Director at StatPro comments: “Smaller, more agile players will be the ones who lead change. The best will leverage technology to put them on a par with the big players.”
Doing the graft
Having a system that can present a meaningful picture adds value in its own right but also takes much of the work away from the resource-pushed boutiques.
That’s because every aspect can be managed off-premise - offering intrinsic appeal to a resource-pushed team in a smaller middle office. A system that can share risk and performance data and multi-task when it comes to analysis and output is the right fit for smaller asset management firms.
For the people at Bob's guide, technology will be a massive enabler of joining past present and future. What’s more, this technology will also contribute to slicing inefficiencies out of a business, a priority that smaller players especially need to work at.
In addition, the ability to automate processes and save time provides significant added value for boutique firms.
Joining it all up
Never before have smaller asset management firms had so much opportunity to take their management of performance and risk to a whole new level.
Combined analytics is not so much the new kid on the block, as the kid no-one knew how to control.
Until now, that is. With the latest technological development, the ability to finally put all your eggs in one basket gives boutique managers a new competitive advantage and a platform for growth.
- Scalable cloud based technology can now do much of the work for smaller managers
- Smaller asset managers need to be able to know their risk limits
- Smaller asset managers need to be able to tell existing and would be investors a compelling story
- Having systems able to combine data and present it as like with like is of important competitive advantage
- Smaller asset managers have little to lose and lots to gain by boarding this technological train