Increasing pressure on investment managers to keep abreast of rapidly changing investment strategies and regulation could trigger a rise in the outsourcing of performance measurement to expert third party service providers.
This was the prediction made by Steve Hayes-Allen, Head of Product Specialists at Mellon Analytical Solutions, the performance and analytics arm of Mellon Financial Corporation, this week at the ICFA Outsourcing Conference in London.
The outsourcing of investment administration activities is something that has been much considered and debated in recent years. This often includes the outsourcing of the production of performance measurement figures and associated analytics. Faced with constantly changing market factors including available asset classes, investment strategies, methodologies and regulation, there is increasing call for investment managers to focus on their core strengths and outsource performance measurement.
Much of the debate in this area has surrounded whether so called ‘value added’ services can be outsourced. It is widely agreed that the ‘number crunching’ components of performance measurement can be outsourced, the loading of data and calculation of portfolio and benchmark returns. It is the qualitative analysis that involves a degree of interpretation that needs more careful consideration. It is here MAS believes the choice of outsourcing partner is key.
Recent years have seen increased investment in a wider range of asset classes and products including; an ever expanding set of derivative instruments, hedge funds, currency, private equity, property and commodities. MAS believes the challenge in dealing with these, from a performance perspective, has been compounded by an increase in the degree of sophistication of analysing performance and an increasingly structured best practice / regulatory environment.
Looking at changes in performance measurement methods, five years ago, an equity style attribution analysis applied monthly at sector level across all asset classes with some simple ex post risk analysis may have been sufficient. This type of analysis could, at a stretch, be calculated in a spreadsheet. Now there is increasing demand for specific fixed income attribution models, to better reflect the investment process, separate calculation methodologies for private equity and property with appetite to drill down to security level analysis on a daily basis. Combined with a greater focus on assessing risk (including ex ante) and not just return, increasingly sophisticated systems and data inputs are required.
Hayes-Allen comments: “Market best practice and regulatory changes, including the widespread adoption of GIPS and the UCITS III requirements, place additional pressure on managers to keep up to date with current methodologies and change their procedures and systems accordingly. Throw in the changing investment strategies that are becoming more and more main stream – absolute return, LDI, 130/30 portfolios – and investment managers have their hands full deciding how to best utilise these and upgrade their investment systems, let alone considering the ongoing production of performance measurement numbers and associated analytics.”
Fraser Priestley, managing director of Mellon Analytical Solutions in Europe, adds: “Choosing a performance measurement outsourcing partner enables an investment manager to have access to the most up to date systems and market best practice. This is accompanied by a dedicated team of performance professionals. The right partner will have a performance team that works closely with the investment manager to understand their style and philosophy and produce the analysis required. The investment managers can benefit from economies or benefits of scale in terms of infrastructure and experience. Additional benefits include clearly defined cost management and, vitally in an ever changing market, an ability for the investment manager to focus on core strengths, investing money to achieve the best possible returns within their investment framework.”
Mellon Analytical Solutions is one of the world’s largest providers of sophisticated investment analysis tools for global money managers and institutional investors. Providing performance measurement, universe comparisons and risk analysis tools and services for investment strategies, MAS helps to maximise investment returns, minimise risk and streamline reporting in changing and complex global markets.