Stradegi attended The Spaulding Group’s inaugural meeting of the Asia Pacific chapter of the Performance Measurement Forum in Singapore, held last month on the 15th and 16th of October, 2015. There was a good mix of attendees from asset managers, asset owners as well as solution vendors. The forum discussed the latest developments in the performance management sphere, and the discussions raised some interesting themes worth writing about.
One of the themes that is prevalent in our industry is about the various “BOR” (book of records) – specifically the ABOR (accounting), IBOR (investments), PBOR (performance) and RBOR (regulatory). In practice, asset managers are moving towards a single “golden” set of BOR, that is turning out to be the IBOR. Global asset managers have operations in multiple countries, and all of these local country offices need to have separate set of ABOR’s (accounting book of records) to satisfy local regulatory and accounting regimes. An investment book of records, the IBOR, is a step towards rolling up all the local office BOR’s and getting a consolidated view of investments across the organization. The data from all of the local country offices is validated, cleansed and transformed into a common set of records that can loaded into the organization wide IBOR system. This gives decision makers in the firm a consolidated set of information that can be used to launch new products, refine regional strategies or support regulatory requirements. Stradegi is seeing an increased interest from asset management firms in Asia-Pacific to consider an IBOR solution, and is working with clients to evaluate and formulate cross functional project plans for IBOR implementations. In our view, a well-designed IBOR solution should be able to meet most of the requirements of the organization, rather than having multiple “BOR” solution and the added complexity of maintaining all these BOR solutions.
As the business reliance on timely P&A (performance and attribution) is increasing in asset management firms, operations teams are finding it hard to meet these requirements. As a result, the operations and technology challenges within the P&A function in asset managers is increasing. Improving the P&A process is not about buying a system, or throwing more data at existing systems, but to go top down from understanding the strategy of the firm and creating a target operating model that is driven by the business model, which then drives the functional model, leading to the organisational design and then the enterprise architecture. The TOM (target operating model) should be an evolving model and should meet the evolving needs of the business, and rather than adopting a big bang approach – having perhaps a measured approach with a feedback loop in the process is better. With every project it would be prudent to have both change management experts, as well as subject matter experts guiding the project forward.
Within the Asian asset management context, there was a discussion around performance and risk functions not collaborating as closely with the front office as they should, and these functions are seen as more of a support function for reporting and regulatory needs. We feel that there could be better working relationships within the front and middle office, with the front office using the performance and risk functions to create better and more robust investment portfolios. We think that it is perhaps best driven from top down rather than bottom up. The senior management have to take ownership and drive the way forward towards greater collaboration between investment, performance and risk teams. Another potential area of improvement is subjecting internal performance and risk teams to service level agreements so that there is a convergence of expectations between teams and clear accountability from the performance and risk teams.
A common area of contention is with calculation of performance numbers in the private equity industry. The perspective of GP’s and LP’s is different from a PE perspective, and the debate is whether the reported IRR’s represent the true performance of the PE funds. PE funds have a ramp up of capital requirements till the time they are fully invested, however from an investor’s (LP) perspective, they need to allocate a certain amount of capital upfront, hence the question is whether using pure time weighted cash flow returns depict the true nature of returns. From the LP’s perspective the problem with IRR’s is that IRR assumes that all cashflows can be reinvested at the fund’s IRR, which is not a realistic assumption. One alternative which can be considered is a modified IRR or MIRR, which assumes interim cashflows are invested in money market instruments. MIRR probably gives a more realistic picture of fund performance, however the investors can be given a range of metrics including IRR and MIRR and then the investors can get the true picture of the fund performance.
Finally, there are no clear standards on performing attribution of private assets from an asset owner perspective. Asset owners have a portfolio of private assets that they invested in. From a private asset perspective, the performance of individual investments is reported in IRR terms. However if you aggregate cashflows, you could create a portfolio IRR. The issue is that the portfolio IRR’s cannot be decomposed into individual investment IRR’s. Hence the performance teams struggle to create meaningful attribution numbers in IRR terms. In our experience while working with asset owners in this region, valuation and attribution of private assets is a recurrent theme, where there is no set standard across multiple jurisdictions. It will be interesting to see how a common set of standards arise, both in terms of measurement as well as attribution of private assets in our industry.