Sophisticated data and analytics processes should drive better control in investment functions

Key points

  • Pension funds and investment service providers are turning to technology to handle increased regulation and portfolios
  • Operations and workflow systems are becoming more important than portfolio management applications
  • The increased need for data and analytics is driving demand for dashboards and purpose-built platforms

Information technology has acquired a reputation for causing disruption for good reason – the adoption of new tools often requires the users to step back and reconsider what it is they are trying to achieve, and what can be done differently – that is, what new techniques and practices might be possible – with new technology.

That is the situation facing the  pension fund industry today. Fundamental factors originating outside of the investment department are forcing unprecedented change in the types of strategies deployed, the packaging in which those strategies are delivered, and the reporting that is required in a society where transparency and social, governance and environmental impact are valued as highly as financial performance.

Long gone are the days of the 60/40 portfolio allocation, rebalanced annually to reflect changes in value resulting from market performance in line with historical trends. Results were forwarded to an administration group that would mail statements to members in due course, and the annual audit of asset value and the tally of active and retired members would be recorded at an annual trustee meeting months later. 

The mission for the pension fund industry is much more complex – and fulfilling that is dictating a reliance on technology to help manage the workflows of an investment company. On the menu is a steady diet of more data and the need for tools that provide more extensive – and more reliable – control over the myriad tasks that must occur in order for pension funds to carry out investment activities in an environment of increasing regulation, market uncertainty, and the growing realisation that ageing populations have not saved enough to maintain their lifestyles in retirement.

Regulatory burden
Three main trends are driving the adoption of technology, says Benjie Fraser, global pensions executive at JP Morgan, who works with more than 80 pension fund clients in Europe, North America and Asia, encompassing both defined benefit and defined contribution plans of corporate and public sponsors. 

The motivating forces are an increase in investment regulation, a drive for efficiency that is bringing about a consolidation of pension providers particularly among public plans, and the expansion of products that institutional investors have turned to maintain returns in the low interest rate environment. “The need for better technology and data is an outcome of those three trends,” says Fraser. “Pension funds need much richer data.”

“The product shift has been into alternatives, private  equity, hedge funds,  and derivatives,  all of which create  more complexity  and greater need  for technology  support”

Benjie Fraser, JP Morgan

The primary driver is regulation. “There is increasing need for reporting and greater transparency by pension funds,” Fraser says. “They need much more flexible information provision,” he adds. The flexibility required today has two dimensions. “Pension funds need to find it easy to go into and use the custodian’s systems from their workstation, and the dashboards have to look and feel much, much, more like the dashboards and user interfaces one finds on private technology applications.”

While funds are facing more regulation, those in Europe will face a steeper tech challenge. “There are sophisticated users of technology at pension funds in all three regions, but because of the regulation coming towards them on matters like responsible investing, I would say the European funds’ use of technology will pick up quite considerably,” Fraser says. “The response will be to make more use of data, which means funds have to consider how they’re going to resource their technology plans.”

Public plans in the UK and Australia are merging, for example, while investment offices are becoming more sophisticated, often by establishing in-house investment skills instead of relying on external sources. “Investment offices are continuing to be very smart,” Fraser continues. “They’re building up internal teams, with people who have very strong oversight skills. In a positive way, they’re challenging portfolio managers that are both inside the funds, running some positions internally, and also externally.”

Perhaps the most important technological drive is the increased range of products that pension funds invest in, and must therefore monitor with respect to performance and compliance with basic investment mandates and ESG and other overlays that vary across the industry. “With interest rates remaining low, funds are looking for yield beyond the traditional asset classes,” says Fraser. “The product shift has been into alternatives, private equity, hedge funds, and derivatives, all of which create more complexity and greater need for technology support.”

Quantum leaps
But with most funds running on tight budgets, pension executives can often ill afford hefty outlays for technology tools and staff to keep up with the support and compliance reporting requirements of a portfolio of complex assets and investment vehicles. So the funds are turning to specialised technology services firms that offer solutions that can handle both the investment-related and workflow requirements of a multi-asset, highly-regulated world, and tapping into the installed base of data at custodian banks, which can support significant technology budgets by leveraging costs across client bases.

Information technology groups continue to maintain the tools that support a core of basic investment functions and make incremental improvements in systems that allow pension fund investment managers and administrators to access basic data, mainly by improving the visual sophistication and information content of dashboards – in short, creating a better user experience for such data as NAVs, securities valuation, cash management, foreign exchange operations and corporate actions.

A virtually unanimous verdict is that the business of creating and delivering investment services has taken a quantum leap in complexity – and the sophistication level is only going to increase. According to an October 2018 survey by Milestone Group, a specialist supplier of managed technology solutions, approximately 75% of respondents said investment strategies being designed to meet the needs of institutional clients today are becoming more complex, and nearly 80% of respondents said portfolios being implemented for institutional investors are becoming so.

The survey measured the extent to which the investment solutions being delivered to institutional investors by several types of firms offering fiduciary management, outsourced chief invesment officer (OCIO) services or a delegated investment practice; 45% were investment consultancies, 17% were investment management firms, and 17% were solely engaged in such services.

With more large pension funds hiring in expertise to undertake roles similar to consulting firms, the multi-asset methodology that is at the heart of the OCIO approach has become the dominant concept underlying the organisation and operation of the primary capabilities for which pension institutions are responsible – investment strategy design, selection, and implementation.

Milestone’s survey of the technology landscape in the OCIO world finds that the industry is on the cusp of a transition. Like a stock driven by investors pursuing the momentum factor, front-office investment staffs’ influence over technology decisions may have peaked. Typically, the technology needs of portfolio management functions are prioritised over those for operations, according to Milestone. The complex investment and reporting environment is fuelling a need for “enterprise technology that allows firm managers to know where they are as a business, and with respect to every client portfolio, in the course of their operating data at any point in time,” says Randal McGathey, vice president multi-asset product North America, at Milestone.

Beyond spreadsheets
But even as the complexity of investment solutions is increasing, and institutions are seeking more alternative investments, most OCIO providers rely on spreadsheets for everything from portfolio analysis and modeling to trade compliance and placement, according to Milestone’s survey. “Spreadsheets are quick to handle, and enable customisation, but they are difficult to administer and can create issues around operational consistency and risk mitigation,” McGathey says. But that era of pension investment management may be passing: most participants predict a change, Milestone says, with more than 41% intending to have a built-for-purpose technology solution in the next 12 to 24 months.

“Spreadsheets are quick to handle, and enable customisation, but they are difficult to administer and can create issues around operational consistency and risk mitigation”

Randal McGathey, Milestone

The next generation of pension investment technology may resemble the systems found in manufacturing plants. Milestone’s main technology solution for multi-asset OCIO functions, for example, is called pControl, and provides process monitoring and workflow systems that support every task involved in investing in pooled vehicles – from compliance and order execution to trade settlement – and consolidating positions for performance evaluation and reporting. Given increased regulation on pension funds and their investment service providers, such a workflow monitoring system could become an industry standard. 

“Our platform tracks things that are expected to occur that have not yet happened, such as orders from a portfolio manager that are waiting to be sent to market, so that nothing is missed due to the absence of a system to help investment operations and other parties manage each process,” McGathey says.

Clearly, “the vision for the future is clearly a trend towards an enterprise solution”, says McGathey. “Not that other observations are less important, but the surprise for us was that the functional area that was said to be most needed was an investment operations function, an end-to-end process for monitoring and management, rather than a portfolio management function,” he says.

This article has been amended to reflect the correct name of Milestone’s pControl product