Performance and risk are growing concerns at Austrian pension funds and to better measure and manage these factors, the funds are implementing a range of third-party and in-house developed applications.
Some funds are using spreadsheets or programming applications from scratch, while others are making use of the performance and risk modules of their service providers, especially custodians. The more advanced funds are looking to state-of-the-art applications, with VBV-Pensionskasse leading the way.
The pension fund of the Austrian arm of electronics company Philips is typical of funds that uses a combination of in-house developed software and applications provided by its custodian bank. With its primary focus on appropriate functionality, ease of use and cost when selecting technology, Philips decided to take up the performance measurement and attribution service of its custodian, but to develop a value-at-risk tool for itself with the help of the custodian.
“Modern technology is important for the efficient operation of the fund,” says Gerhard Walch, pension fund manager at Philips.
Although multi-employer pension fund APK Pensionskasse developed its own front office system for its investments (as it also did for member administration), with some performance and risk functions, it also relies on its custodians to provide these functions. One of the key purposes of using technology is to gain insight into the investment process, says Günther Schiendl, head of investments at APK, and performance and risk analytics are essential for intelligent investment decision making.
Like APK, multi-employer pension fund Bonus Pensionskassen developed its own software for managing its assets, although in this case it outsources the actual investment. The fund uses an accounting system from the German business software giant SAP, with a customised administration system from a Swiss software supplier that the fund did not name. And like APK and Philips, Bonus is considering giving members access to their accounts via the internet, although it has not yet drawn up implementation plans, says Johannes Puhr, investment manager at Bonus.
Multi-employer pension fund Victoria-Volksbanken Pensionskassen is part owned by Österreichische Volksbanken (Oevag) and the bank performs a number of functions for the fund, including asset allocation, investment, performance and risk measurement, attribution and custody.
Oevag developed its own risk management tools, and the pension fund uses these for risk budgeting, while for performance measurement and attribution it uses the PMS portfolio, performance and risk management system from Bonn-based Much-Net, says Claudio Gligo, investment manager at Oevag Institutional Asset Management. Gligo believes that pension funds nowadays need to have modern technology at their disposal. “It is a competitive advantage to have state-of-the-art systems,” Gligo says.
VBV was formed out of a merger between multi-employer Vereinigte Pensionskassen and the banking and insurance sector pension fund BVP-Pensionskassen in 2004 and has now become the biggest pension fund in Austria. The fund measures and manages performance risk with the aid of the Quantax application from the Swiss technology supplier Comit.
VBV is pursuing a number of innovative strategies with regards to the investment choices it offers its members in a “lifelong pension” model (see IPE January 2005), and in the asset classes it invests in, with a recent move into commodities.
In addition, VBV has a high proportion of funds of funds among its assets, and these have to be broken down into their components for performance and risk analysis. Furthermore, upcoming competition from insurance companies from September this year and low yields from fixed income are makes it necessary for the fund to take on further risk, says Wolfgang Pinner, chief investment officer at VBV-Pensionskasse.
All these factors called for a sophisticated application. “Modern technology is especially important for risk management purposes,” Pinner says.
Quantax is an application for analysising risk and returns, with a wide range of functionality in the one platform, says Patrick Odoni at talkfinance, Comit’s partner in offering Quantax as an application services provision (ASP).
In the ASP model, the software runs at the supplier’s site - in this case talkfinance - and the supplier handles all technology and staffing issues, including implementation and integration with customer systems as well as data sources such as market data, reference data and so on.
It also speeds up implementation considerably since there is no hardware purchase, installation and integration required by the customer. Instead, the supplier (talkfinance) customises the application to meet the customer’s - in this case VBV’s - requirements, and arranges to receive the customer’s transaction and portfolio data, often direct from the custodian.
The other attraction of ASP applications is that they generally do not require upfront licensing fees, but are charged on an annual, monthly or even per-use basis. Although all these factors were relevant for VBV, Pinner says that the number-one consideration in choosing Quantax was the functionality it offers, although cost was also an important factor. He also notes that there were no domestic systems available that would have met the pension fund’s needs.
Quantax is an integrated trading and risk-management system, supporting a wide range of instruments. It includes a number of standardised interfaces for linking to Excel spreadsheets, SQL databases, XML-based data sources, as well as leading industry data providers. Analytics include position, market value, risk, profit and loss and performance, with detailed cash management.
Risk functions include the ability to simulate transactions with various market parameters, and user-definable stress scenarios. The system competes with the major trading and risk systems from global suppliers such as SunGard, SimCorp and Trema. So far, only one other pension fund uses the system. It is a large Swiss fund that talkfinance would not name.
VBV uses Quantax for a daily report on performance across all portfolios, says Odoni.
The system breaks down the performance of funds of funds into the performance of their component parts. Complex benchmarking that focuses both on single instrument and target portfolio benchmarks is undertaken, as is performance attribution. In terms of risk management, the system serparates out all positions - funds of funds into single funds and into single instruments - on a monthly basis, which allows a full breakdown of the risk across all risk factors. In addition, sensitivity analysis and stress scenarios are run, and value-at-risk is calculated.
The system also produces quarterly reports for the Oesterreichische Kontrollbank Aktiengesellschaft (OeKB), covering a full valuation of all portfolios, and categorisation of
all positions into asset allocation classes as set by the regulator, says Odoni.
In terms of implementation, VBV was able to get the first full valuation of all its portfolios within two months, says Odoni. The first full-year performance analysis (retrospectively) was done within four months. Although a wide range of functionality is now live, talkfinance and VBV are still continuing to add more functionality.
The main challenge in the implementation has been sourcing and maintaining the data – historic market data for both liquid and illiquid instruments, historic breakdown of funds of funds, and so on. “A key point was the set-up of adequate process to ensure a smooth data flow to Quantax,” says Odoni.
As performance and risk move up the agenda at pension funds in Austria, more are likely to follow the lead of VBV and Victoria-Volksbanken and look to leading European and international suppliers of technology for their analytical tools.