Market Practices & Trends in Investment Performance Analysis Executive Summary

By Peter Ellis | 23 February 2015


BI-SAM is funding a program of research into the business practices that are employed by performance teams within asset management organisations. The research program was initiated in Q2 2014 and will continue in 2015.  The work is being carried out by PK Consulting Ltd and is fully funded by BI-SAM.

The program has three main objectives:

1. To define a best practice framework for Performance functions in asset management organisations.

2. Use this framework as the basis for an independent, objective method for assessing the capability of Performance functions.

3. To identify the main areas in which the Performance ‘industry’ needs to enhance market practice

A key question for any business is: How do you measure the effectiveness of your business functions? This question has become increasingly important for asset management firms over the past five years as 1) their clients have become more demanding and 2) the pressure on their profit margins has intensified.

Measuring the effectiveness of Middle Office functions can be challenging. These functions are not directly involved in value-creating processes and some are not subject to operational constraints defined by markets and regulators. The situation is particularly difficult in the case of Performance functions because the measurement and analysis of investment performance is an inexact discipline. There are different ways to calculate the performance return for a portfolio (e.g. internal rate of return, modified-Dietz, daily time-weighted) which will usually deliver different results. It is not the case that one of these different results is correct and the others wrong. It is just that there are different ways of measuring and describing investment performance. Similarly, there are different techniques that can be used to calculate attribution and other performance and risk metrics.

So how do asset management organisations measure the effectiveness of their Performance functions?

The first phase of the research program delivered a Performance Best Practice Framework. This was used in the second phase as the basis for a survey of 55 asset management companies, in which data was collected about current working practices in Performance functions.

The findings of the market survey paint a picture of a performance ‘industry’ that is coping reasonably well with the pressures of delivering services to internal and external clients. However, Performance functions are under pressure in some areas that should be a concern for the asset management industry as a whole.

Many Performance functions are concerned about the scalability of their systems and, more specifically, about the length of time that their systems can continue to support expected business volumes. At the same time, many Performance functions are still reliant on manual processing, especially in those areas in which they interface with upstream and downstream business functions. And the provision of fixed income attribution is still an industry-wide issue, with Performance functions unable to match the maturity and service level provided for equity attribution.

When these issues are viewed together it is clear that asset management organisations need to be asking themselves a key question: How well positioned are we to cope with the increased demand from (and higher expectations of) investors, with the increased complexity of investment processes and asset types, and with the increased business volumes that these trends are generating?

Given the length of time taken to complete the selection and implementation of systems in key business functions such as Performance, asset management organisations really need to know the answer to that question today.

For more information on the market survey click here.

By Peter Ellis, Director, PK Consulting

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