Portfolio management goes beyond Excel | New


In the era of digitalization and technological transformation, is it right that asset owners around the world continue to rely on spreadsheets as their primary mechanism for managing asset allocation?

That was the starting question for a research project by The ValueExchange (VX), aimed at determining what factors asset owners need to keep in mind when reshaping their models to adapt to myriad pressures. external.

The survey results are based on insights from over 130 asset owners and their service providers worldwide.

What emerges strongly from direct feedback from asset owners, collected in the first half of 2022, is that most asset owners are still using long-standing methods to track their asset allocation, performance and risk management. . As such, they are likely not optimizing these operations.

Excel remains the software tool of choice for asset allocation management today, with just under half of respondents (45%) using it for their overall asset allocation.

However, this is not the only way investors manage their asset allocation. There is a strong connection between those who outsource their fund management and those who outsource their asset allocation vision – 38% of those who use external managers rely on their master custodians to provide a consistent vision and consolidated day-to-day allowances.

The use of Excel also decreases as funds increase in size and complexity. Among those with the highest levels of assets under management, the dominant operating model is a 50/50 split between primary custodians and internal systems – the balance largely depending on organizational character and their reliance on third-party managers.

“Larger funds will undoubtedly manage a more diverse and complex mix of assets, while having more stringent risk management and regulatory requirements, which spreadsheet-based operating models will have more more difficult to support,” VX general manager Barnaby Nelson said.

“Similarly, those who manage their investments in-house are more likely to have access to systems and technology that can be repurposed for asset allocation insight.”

What’s wrong with Excel anyway?

VX research highlights a key threshold (approximately €2-3 billion) beyond which complexity costs begin to have a significant impact on an asset owner’s operating costs.

For this reason, some surveyed asset owners said that Excel was not sufficient for their needs. Also, “Excel is error-prone and not suited for more complex reporting requirements,” one said.

“Excel is error prone and not suitable for more complex reporting requirements”

“We have largely moved to Power BI, from a centralized data store, with a noticeable increase in our reporting capabilities. Regulators, however, require data in fairly primitive formats, which reduces the benefits of our change.”

VX recognizes that using spreadsheets definitely has its benefits, including cost. For smaller funds, the largely fixed costs of managing allocations in spreadsheets can offer significant savings as asset volumes grow.

Nelson said smaller funds said they use a variety of ways to extend and enhance Excel, allowing for more sophisticated tools and visualizations to be built on the core platform.

As pension fund governance and disclosure requirements increase, there is clear evidence of a diseconomies of scale, according to Milestone Group’s Geoff Hodge, sponsor of the VX report.

“Simplistic tools simply can’t keep up with the complexity that mid-tier asset owners face, forcing them to deploy expensive alternative platforms that can actually increase asset owners’ unit costs,” did he declare.

Asset owners should be wary of getting caught up in this costly middle ground, Nelson added.

“They need to recognize the importance of every operating decision to bring them closer to that critical cost threshold. Whether it’s appointing a second external manager or starting to invest in complex alternative products. Every decision will have a clear cost impact.

Asset owners’ comments on the survey showed how approaches to portfolio management have changed significantly, largely due to the increased focus on alternative assets and the decision by some to internalize good number of their investment capacities.

“As a result, we have seen a growing need to review our operating models, keeping an eye on areas such as operating costs and data management. Technology is reshaping the way we manage our portfolios and interconnect, and the pandemic has accelerated this trend,” one said.

The rebound problem

In the VX survey, 66% of asset owners plan to run system automation projects over the next three years – with outdated spreadsheets and macros clearly in sight.

After experimenting with portfolio management systems, many asset owners end up being disappointed with the failures of these systems (at the asset allocation level) and therefore end up gradually returning to what they know: Excel .

Nonetheless, Nelson reported from the research that 40% of asset owners have transformation work underway in 2022 and 2023 “and their top priority is getting rid of Excel.”

A key theme in VX transformation research is the importance of data and the need to turn data capture from an art to a science.

Harnessing data requires long-term commitment, which means not only getting the right people in place, but also keeping them there, Hodge said.

Deciding what is best for your fund is also key, given its size and time horizon. “Be clear and realistic about it,” Hodge said.

“If we look at the asset allocation process, which accounts for 80% of returns on investment, it’s probably the least well-funded part of the organization.”

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