In an era of digitisation and technological transformation, is it right that the world’s asset owners continue to rely on spreadsheets as their primary mechanism for managing asset allocation?

This was the starting question for a research project from The ValueExchange (VX), looking to find out what factors do asset owners need to have in mind as they reshape their models to accommodate countless external pressures.

The survey results are based on the insights of over 130 asset owners and their service providers around the world.

What comes across strongly from the direct asset owner feedback, gained in the first half of 2022, is that most asset owners are still using long-standing methods of tracking their asset allocation, performance and risk management. As such, it is likely they are not optimising these operations.

Excel remains the software tool of choice for asset allocation management today, with just under half of those surveyed (45%) relying on it for their overall asset allocation.

However, it is not the only way that investors are managing their asset allocation. There is a strong link between those who outsource their fund management and those who outsource their asset allocation view – with 38% of those using external managers relying on their master custodians to provide a coherent and consolidated view of allocations on a daily basis.

The use of Excel also diminishes as funds grow in scale and complexity. Amongst those with the highest levels of assets under management, the prevailing operating model is a 50/50 split between master custodians and in-house systems – with the balance depending largely on the organisational character and on their reliance on third party managers.

“Larger funds will no-doubt be managing a more diverse, complicated mix of assets, along with having more stringent risk management and regulatory requirements, which spreadsheet-based operating models will increasingly struggle to support,” said VX managing director Barnaby Nelson.

“Equally, those managing their investments internally are more likely to have access to systems and technology that can be re-purposed for an asset allocation view.”

What is wrong with Excel anyway?

The VX research highlights a key threshold (at around €2-3bn) beyond which the costs of complexity start to have a material impact on the running costs of an asset owner.

For this reason, some asset owner respondents stated that Excel was not sufficient for their needs. Furthermore, “Excel is error prone and not suited to more complex reporting requirements,” said one.

“Excel is error prone and not suited to more complex reporting requirements”

“We have largely moved to Power BI, from a centralised data store, with a noticeable uptick in our reporting capabilities. Regulators, however, require data in fairly primitive formats which reduces the benefits of our change.”

VX acknowledges that use of spreadsheets no doubt has its advantages, not least of all being cost. For smaller funds, the largely fixed costs of managing allocations in spreadsheets can offer significant economies as asset volumes grow.

Nelson said smaller funds have reported using various ways to extend and enhance Excel, enabling more sophisticated tools and visualisations to be built on the base platform.

As the governance and disclosure obligations on pension funds increase, there is clear evidence of a diseconomy of scale, according to Geoff Hodge of Milestone Group, sponsor of the VX report.

“Simplistic tools simply cannot keep up with the complexity that mid-tier asset owners face, forcing them to deploy costly, alternative platforms that can actually increase asset owners’ unit costs,” he said.

Asset owners must beware of being caught in this expensive middle ground, Nelson added.

“They must acknowledge the importance of every operating decision in moving them closer to this critical cost threshold. Whether it be appointing a second, external manager, or beginning to invest in complex alternative products. Every decision will have a clear cost impact.”

Overseeing allocations today

Asset owner feedback to the survey showed how approaches to portfolio management have changed significantly, largely owing to the increased focus on alternative assets and the decision by some to insource many of their investment capabilities.

“As a result, we have seen an increasing need to review our operating models, with an eye on areas such as operating costs and data management. Technology is reshaping how we run our portfolios and interconnect, and the pandemic has accelerated that trend,” said one.

The bounce-back problem

In the VX survey, 66% of asset owners plan to run system automation projects in the next three years – with spreadsheets and outdated macros clearly in their sights.

Having experimented with portfolio management systems, many asset owners end up disappointed in the failings of these systems (at an asset allocation level) and hence they end up gradually returning to what they know: Excel.

Nonetheless, Nelson reported from the research that 40% of asset owners have transformation work going on in 2022 and 2023 “and their top priority is getting rid of Excel.”

A key theme from the VX transformation research is the importance of data and the need to turn data capture from an art to a science.

Harnessed the data requires a long-term commitment, which means not only getting the right people in place but keeping them there, said Hodge.

Deciding what’s best for your fund is also key, given its size and time horizon. “Be clear and realistic on this,” said Hodge.

“If we look at the asset allocation process, which represents 80% of investment returns, it’s probably the least well-funded part of the organisation.”

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