As the markets continue to go through difficult and unsettled times, investors are demanding more reporting on performance and attribution, both in terms of frequency and depth. Funds and asset managers are under pressure to meet international standards of reporting and to make their reports more accessible, including daily, if not real time reporting via the web. In response, software suppliers are upgrading their performance and attribution modules, which they will supply either integrated with their investment management systems or as stand-alone applications.
The minimum requirement for firms in terms of reporting performance nowadays are the Global Investment Performance Standards (GIPS) and Performance Presentation Standards (PPS) of the Association of Investment Management and Research (AIMR), says John Simpson, director of research at Los Angeles-based portfolio management systems supplier Integrated Decision Systems (IDS). “There is a great deal of acceptance of these standards world-wide as firms see an increasing need to market themselves to clients outside of their own countries,” he says.
Klaus Krarup-Christensen, head of pre-sales for Copenhagen-based investment management system supplier SimCorp, agrees that the AIMR standards are now the minimum requirement and software providers must be able to support them. And in addition, organisations are looking for greater flexibility in terms of their reporting abilities, both internally and externally, he says. They want to have an application that they can configure to produce the reports they require both within the organisation and to meet the increasingly demanding requirements of clients and potential clients. But these reports must be produced in a cost effective way, he says.
The people who work on performance management tend to be highly skilled and highly paid, says Krarup-Christensen. It is an expensive waste of their expertise if they have to spend their time collecting and manipulating data. This is what the system should do, he says.
Niall McIntyre, marketing manager of London-based analytics software supplier Beauchamp Financial Technology (BFT), says that a performance measurement system should combine flexibility and automation to enable organisations to satisfy the demanding needs of today’s clients. “Investors are increasingly expecting high quality reports to be up on the web on a daily basis, if not in real time,” he says. Simpson agrees and says that IDS’s GIM 2000 system can calculate up-to-the-minute performance. Returns can be posted monthly or on a rolling month-to-date basis, refreshed daily and posted on the web.
Firms are finding it increasingly difficult to provide these kinds of facilities, as well as to cope with the size of portfolios and volumes of transactions with traditional tools such as spreadsheets, says Simpson. The stipulations of GIPS need large amounts of data and powerful computation. Krarup-Christensen agrees, and says that managing the data is in fact a greater challenge than the analytical mathematics of performance measurement and attribution.
IDS, SimCorp and BFT are among a number of software suppliers that offer performance measurement and attribution software, either standalone or as part of a suite of portfolio management products. Others include London-based Misys Asset Management Systems (the Apollo product), New York-based Sungard (Decalog Xamin), Toronto-based FMC (FMCSylvan), DST International, based in Surrey, England (HiPerformance), New York-based Thomson Financial (Oneva Perform), Effron, based in White Plains, New York (Effron Performer), and New Jersey-based Princeton Financial Systems (PAM).
Meanwhile, London-based StatPro has established itself as a specialist in this area, with a suite of products for performance, attribution and support for GIPS. The company recently announced an alliance with FT Interactive Data, also based in London, to incorporate the latter’s index data service, which includes the MSCI, FTSE and Standard & Poor’s indices, within its performance measurement systems. It customers include Foreign & Colonial Management, Clerical and Medical Investment Group and Invesco France.
There is a debate in the industry about whether it is better to get performance and attribution applications from a separate specialist supplier or as part of an investment or portfolio management system. Krarup-Christensen reports that all SimCorp’s buyside clients for its investment management system are now taking its performance measurement and attribution modules as well, while those that initially approach the company about performance and attribution applications invariably end up taking additional products – usually risk and compliance applications. SimCorp clients include Deutsche Asset Management, Nordea Asset Management & Life and Scandia Asset Management.
A major advantage of getting performance measurement and attribution from the same company that supplies the portfolio management system is that the relevant data is all in one place, says McIntyre. “We try to build all our application functions onto the same database platform,” he says. This not only cuts down data management tasks within the organisation, but also means that data for performance measurement is already organised into the hierarchies and strategies that the organisation might be using for its investments.
But whether they get their performance measurement and attribution applications from a separate supplier or not, it is important that the applications cover a broad range of instruments, says Krarup-Christensen. Where an asset manager may have once focused only on equities, now it is more likely that a firm will need support for fixed income, derivatives and other instruments. “Equities are not so popular any more, but plain vanilla bonds don’t offer such high yields either, so there is a need to go into credit products,” he says. An application needs to be future proof – an organisation that may just use equities today, might want to go into asset swaps tomorrow, he says.
There are also regional differences in the instruments and analytics that the applications must support. For example, France, Germany and Scandinavia tend to need more sophisticated fixed income analytics because they make more use of these instruments, compared with the UK, where equities predominate – although this is rapidly changing, says Krarup-Christensen. Also, firms in continental Europe tend to use an arithmetic approach to performance attribution (where the elements of stock selection, asset allocation and currency overlay are added), whereas firms in the UK tend to use a geometric approach (where the elements are multiplied together).
There are also regional variations in the standards, says Simpson of IDS whose clients include UBS Global Asset Management and UBS PaineWebber, London-based Silchester International and Guernsey-based Stenham Gestinor Asset Management. Although GIPS forms the main body of standards across the globe, a system must be able to accommodate local issues, such as real estate and after-tax performance in the US, and different tax regimes in Europe.
“Over time we will probably see more commonality in performance measurement, but right now the market is seeing the importance of after-tax performance, especially in the private wealth area,” says Simpson.
Meanwhile, hedge funds have their own distinct requirements. BFT, whose clients include London-based Pavilion Asset Management and New York-based Focus Asset Management, initially aimed its Profit Analyser performance measurement and attribution tool at the hedge fund community where funds are focused on absolute performance, rather than performance in relation to a benchmark as is standard in the long-only world. The company is now extending the product to cover relative performance as well and is looking to sell it into the asset management and pension fund community. However, McIntyre suggests that long-only firms are going to become interested in absolute returns and performance management in the near future. In falling markets, it is unsustainable for long-only firms to report only in terms of relative performance. “I can’t believe investors will wear it for much longer,” he says.
Hedge funds are increasingly looking for the kind of advanced reporting tools found in bigger asset managers, says McIntyre. With experienced staff moving from mainstream institutions into hedge funds, and traditional institutions setting up their own hedge fund arms, there is bound to be a growing convergence between the two types of firm, with both wanting the same level of sophistication in their reporting tools.