Workflow

KEY ISSUES FOR THE MIDDLE OFFICE IN ASSET MANAGEMENT FIRMS TODAY

Issue Two: Q3 2016

ContentsKEY ISSUES FOR THE MIDDLE OFFICE IN ASSET MANAGEMENT FIRMS TODAY

Double ActPerformance and Risk under the same spotlight

New InsightThe case for combined performance and risk analytics

Single ViewKey benefits for asset managers

Measuring UpData Leaders versus Data Laggards

Think big. Think precision.Why big data needs to be smart data

Let me tell you a storyThe need for asset managers need to drill down into the narrative

Future VisionariesWhy risk managers command center stage for asset managers today

The Big WHENStress-testing Brexit with combined performance and risk analytics

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In the third issue of The Future Middle Office series, published in May, we took a look at the need for asset managers to respond to market conditions by working to a single set of data and offering combined performance and risk analytics.

Since then, we have explored the issue from a range of angles to show how leading firms are placing both sets of data under the same spotlight to provide a more compelling and granular account of decisions made and future investment strategy.

Damian Handzy, Global Head of Risk at StatPro sees it like this: “For a manager, comparison of where you thought you were going to make your money and where you actually did achieve this is invaluable.”

For the Data Laggards out there, getting any sort of meaningful overall picture may still feel like mission impossible.

But a combined approach is worth the investment because it enables asset managers to present a more accurate account of performance - and the cost of that performance - via risk analytics to their investors.

What is certain, breaking down the silos in which separate teams used to control “their own” data is a trend that will continue to gather steam.

Take a look at this second issue of Workflow magazine to review the latest developments.

Double ActPERFORMANCE AND RISK UNDER

THE SAME SPOTLIGHT

NEIL SMYTH, MARKETING & TECHNOLOGY DIRECTOR, STATPRO

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New Insight: the case for combined performance and risk analyticsTechnology is now available that makes it possible to combine multi-asset class performance and risk analytics into a single system.

This has been described as a middle office Holy Grail, as successive generations of teams have struggled to reconcile the outputs from siloed legacy systems and labored to make manual workarounds in order to produce consistent reporting.

KEY ISSUES AND CHALLENGES:

CLIENT DEMANDClients now expect comprehensive risk management reports and up-to-date information on absolute performance versus a benchmark. Legacy systems, conflicting data and manual consolidation tasks in the reporting process are too time consuming and too costly.

THE RACE FOR DATA“The vast majority of institutional investors are ramping up their spending on managing data,” says State Street. Those that can’t match up to this challenge are less likely to be able to compete.

CONSISTENCY OF MEASUREMENT“The consistency of the measurement between the risk and the performance

allows you to drill in, allows you to do more detailed analysis and to know that your numbers are being generated self-consistently,” says Damian Handzy, StatPro’s Global Head of Risk.

Stress testing different investment scenarios and the effect that they might have on the performance of an investment portfolio is just one example of how this might be useful.

TECHNOLOGYTechnology hosted remotely and securely in the cloud is potentially unlimited in the size, scope and complexity of the data that it can contain. It is hugely scalable and - with a single data source - its consistency is never in doubt.

THE ROAD AHEADThis level of integration, analytics and sheer computing power has not been available until now but its arrival is perfect timing.

Combining risk and performance analytics has stepped out of the shadows of the middle office and is set to take center stage in the competition for business, long-term survival and profitability.

“This level of integration, analytics and sheer computing power has

not been available until now.”

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Read the full article

“We believe the second half of the decade will transform the

middle office in a way not seen since its inception. This evolution

will be driven by the convergence of some front and middle office

functions—namely the generation of risk and attribution data.”

Single View: key benefits for asset managersCombining performance and risk attribution analytics in a single view gives a much better picture to the front office.

That’s because asset managers can get an instant view of how the money from previous investments was made, how that compared with what was expected and the level of risk if similar action is taken in the future.

In a world where complex investment strategies, increased data volumes and regulatory requirements have all increased exponentially, this is increasingly important. The right systems and data are a massive facilitator and managers need more powerful tools to make better, more informed decisions.

THE NEED FOR FRONT AND MIDDLE OFFICE CONVERGENCE

The more asset managers can harness their middle and front office, the more they can harness their data. Once this is done the right analytical process will give them the bigger picture.

Large asset managers especially need a big picture that is clear of irrelevance, clear of obsolete calculation and instead shows a single data set analyzing future, past and every single asset class. They need analytics that are broad, deep and reflective of what they need to know.

CITISOFT, 2016 OUTLOOK REPORT

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DATA LEADERS ARE BETTER AT

EXTRACTING INSIGHT FROM

DATA

75%

50%

43%

70%

Extracting valuable insights from a large

volume of data

Generating forward-looking insights from

our data

Integrating our performance analytics with our risk analytics

Evaluating risk and performance in relative

and absolute terms

Conducting scenario and stress testing on the investment

portfolio

Optimizing our electronic trading

strategies

Investment analytics and data are keeping

pace with thegrowth of the business

The complexity of managing our data

issues distractsemployees from their core focus

72%

83%

96%

65% 92%

7%

50%

64%

73%

53% 50%

33%

MANAGING RISK AND

PERFORMANCEELECTRONIC

TRADINGPREPARING

FOR CHANGE

Leaders

Laggards

Chasing Alpha - How data and analytics help alternative asset

managers to outperform the packState Street Corporation

Measuring Up: Data Leaders versus Data Laggards

Download the eGuide

As appears in Performance and Risk Analytics 2016-2020: why large asset management firms need a combined approach

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“Data has become the lifeblood of business,” according to State Street in a recent report. “In a fast-changing environment they need to act swiftly and decisively to seize opportunities. They are racing to keep pace with a deluge of regulations, all of which place major demands on their data infrastructures. The same report also coins the phrase, “transforming big data into smart data,” a particularly relevant concept as data storage and handling processes have evolved as significant challenges for asset managers.

Big data can provide the path to addressing these issues. The computational power that is now available, coupled with new database technologies and new development platforms have made it easier to construct systems that can help managers of all sizes to meet the analytical requirements of internal and external

clients, including regulators.

The cloud has also made this achievable. Scalable and elastic computing is perfectly in tune with the lumpy calculation requirements of asset management analytics. Performance and risk are the key areas of interest from all parties but they are in fact aspects drawn from very similar data.

Finally, cloud based storage and flexible computing offer the ability to use a single data source from which performance and risk analytics can be drawn as and when required.

Cost Efficiency

Firstly, the need for expensive investment in local systems has been removed. With

the computing power and greatly improved functionality now available, the cost saving of using a single, cloud based data source

can be significant.

The benefits are plain to see:

Speed

More importantly, the speed of analysis and reporting is now greatly accelerated. End of

month batch reporting need not be the case, as analytics can be drawn from the system within

hours and minutes (and without the manual work around time previously required).

Think big. Think precision.Why big data needs to be smart data

Download the eGuide

As appears in Making the Link: the strategic benefits of combined performance and risk analytics

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This recent headline in the FT is not a story asset managers want to hear.More to take in:

of active equity funds underperform

“The findings pile further pressure on active fund managers, who have come under repeated attack... for charging

high fees for underperformance.”

“There are good managers out there but they are not easy to find.”

“... which is why many institutional investors don’t bother looking.”

Let me tell you a storyThe need for asset managers need to drill down into the narrative

In May we published a slideshare to explore why (and how) asset managers should improve their storytelling skills when reporting on performance, attribution and risk.

It starts like this:

In this context, it’s no surprise that clients and shareholders today need more detailed reporting on investment strategy. They need a more vibrant picture of past, present and future

activity, with underlying data to support decisions made.

We’re not talking about top level headlines. They want granular, 360 degree analytics and reporting… and they want it now.

That’s why asset managers today need a compelling, water-tight narrative to justify their decision-making.

Based on an in-depth study by S&P Dow Jones Indices, the FT reports:

4/5

Four out of five active equity funds failed to beat their benchmark

over the past five years.

97 per cent of funds underperformed.

98.9 per cent underperformed over

the past 10 years.

97.8 per cent of underperformed.

IN EUROPE

EMERGING MARKETS

US EQUITY FUNDS

GLOBAL EQUITY FUNDS

98.9%

97% 97.8%

View the Slideshare

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86%

Future VisionariesWHY RISK MANAGERS COMMAND CENTER STAGE FOR ASSET MANAGERS TODAY

Powerful central data sources are now key to placing risk analytics at the centre of asset management businesses.

One reason for this is the complex risk matrix that asset managers now need to factor into their investment models. As long ago as 2013 EY’s Risk Management for Asset Management survey listed no less than 20 top risk categories that were chosen by their respondents:

Read more

Unsurprisingly, the sheer number and variety of risks that affect portfolios from differing aspects makes risk management highly challenging (and talented risk managers in strong demand). Significantly, regulatory risk topped the list of asset managers’ concerns in the EY survey.

In the intervening years since this survey was carried out, further regulations have rolled off the production line and more will surely follow. While estimating and managing risk has become highly complex, regulators require complete look through of both data and the models that produce and analyze it.

As a result, it is critical that risk analytics and performance measurement are drawn from the same big data set. In addition, consistency between risk and performance reporting is an absolute priority.

Regulatory risk

Counterparty/credit risk

(P ure) operational risk

Conduct/mis-selling risk

Investment risk

Liquidity risk

Outsourcing risk

Mandate risk

Business model risk

Reputational risk

Market risk

Tech — data risk

Tax risk

Country risk

Legal risk

Correlation risk

Misc. risk

Fiduciary risk

Tech — systems risk

(O ther) fraud risk

76% vs. 67% in 2012

73%

73% vs. 82% in 2012

56% vs. 24% in 2012

64%

61%

52% vs. 40% in 2012

44% vs. 50% in 2012

32%

22%

17%

12%10%

63% vs. 36% in 2012

47% vs. 24% in 2012

48%

12%

21%

38%

38%

“It is critical that risk analytics and performance measurement are

drawn from the same big data set.”

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The Big WHENSTRESS-TESTING BREXIT WITH COMBINED PERFORMANCE AND RISK ANALYTICS

In June we ran with The Big IF slideshare. As the main debate now is around dates for implementing Article 50 to start the process of the UK leaving the EU, the piece should more accurately be re-titled The Big When.

It’s still too early to tell how events around Brexit will unfold, but what we can say is that the correlated/predictive stress tests we reported on three portfolios are looking remarkably accurate to date:

A small Brexit impactHere we took the minimum values for each factor, for example, sterling down 5%

and US bonds up 2%

A large Brexit impactHere we took the higher end of the

range for each factor.

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FIRST WE RAN TWO STRESS TESTS:

Then we performed a multivariate regression analysis on the constituents of three portfolios to estimate the potential impact on such a portfolio. This is what we saw:

NOW WE CAN SEE WHAT THE POTENTIAL DAMAGE MIGHT BE AND WHERE.

• Global long/short equity could drop by as much as 7% in a Brexit large scenario. We might need to make some adjustments.

• US institutional investor is less impacted. Could elements of this strategy be applied elsewhere?

• European asset managers could see a 5% drop. Could they rebalance their portfolio in favor of countries expected to suffer less?

IN SUMMARY:

Having the right data around performance, attribution and risk into a single source improves accuracy and speed of response.

Armed with this level of information, when shockwaves such as Brexit (or even small tremors) hit the markets, asset managers are better prepared to fine-tune or completely shift their investment strategy.

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Global long / short equity

US institutional investor

European asset manager

-3.5%

-0.5%

-3%

-7%

-2%

-5%

Portfolio Brexit small Brexit large

Read more

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T: +44 20 8410 9876F: +44 20 8410 9877

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