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Redefining the Asset Owner Data Experience
For too long, institutional investors have been stuck with technology developed for and by asset managers. Not anymore.
As seen in Institutional Investor.
U.S. universities wrap up their fiscal year on the last day of June, when students have long since finished finals and campuses aren’t especially abuzz. However, tucked away in an administration building, eyeballs are pouring over newly arrived spreadsheets of up-to-date valuations from private equity managers. Each time a valuation comes in, it is manually added to the investment performance calculation so that the portfolio management team and CIO can see what their one-year returns will be and – eventually – a public report can be released by the school.
This scenario, due to lag times of up to three months for some alternative asset valuations, sounds antiquated in 2020 – and it is, even if investment professionals at institutions aren’t aware of it yet. A new set of capabilities from Northern Trust Front Office Solutions allows investment teams to apply a proxy valuation that best represents the beta of specific assets while they’re waiting for the asset manager’s final report. In short, the technology allows for the easy calculation of lagged and unlagged performance that many institutions require to satisfy accounting requirements and deadlines, or to deliver reports to their board.
“It’s a challenge encountered by asset owners of all sizes,” says Melanie Pickett, Head of Northern Trust Front Office Solutions. “We see the same issues at a $2 billion university endowment that we see at $150 billion pension. Regardless of the sophistication level of an investment team and its technology tools, most multi-asset class problems still boil down to spreadsheet exercises because there just haven’t been tools that seamlessly combine public and private market assets.”
Until now, the tools of the trade for asset owners have largely been hand-me-downs from the asset management industry. Tools were developed in a bubble of sorts to be function specific or asset-class specific, and asset owners were left to pull them together to approximate something like a holistic system.
“That put asset owners in the position of cobbling together tools for risk or liquidity or exposure, or private markets or public markets, which left the activities of data aggregation and normalization across all of those different tool sets highly manual – particularly given the concentration in alternatives, which is a highly manual asset class. No one really took the time to think about the unique problems asset owners are trying to solve, and to create and build out a platform just for them,” says Pickett.
Northern Trust’s Front Office Solutions (FOS) team has been working successfully to change that, and in October announced the launch of its web-based research management tool for institutional investors that manage sophisticated portfolios, including alternative investments. The tool answers complex asset owners’ needs for a more unified capability enabling better investment decision-making by integrating qualitative research, meeting notes and documents into the platform alongside the quantitative functions used by portfolio management teams. In addition, the group also announced the integration of advanced investment and liquidity analytics into its FOS platform. The enhanced capabilities to evaluate prospective and peer investments alongside their own portfolio further augment the platform’s power in assisting institutional investors’ portfolio analysis and decision-making.
The overall effect of these innovative solutions is a one-stop home for asset owners’ qualitative and quantitative data, where they can evaluate their current portfolio, as well as portfolio transactions that they are anticipating or evaluating.
“For example, our liquidity module enables clients to look at the liquidity of their existing portfolio and any anticipated transactions, such as redemption to hedge funds or capital calls by their private equity managers,” says Pickett. “But they’re also able to create ‘sandbox transactions,’ which allow them to anticipate or evaluate changes in liquidity that might occur when they propose additional portfolio actions. We’ve also built the first truly multi-asset class liquidity module, so asset owners can evaluate the liquidity of their marketable securities and hedge fund liquidity, next to the probabilistic views of what they anticipate their private equity managers may do. Even though private equity assets aren’t considered liquid in the traditional sense, the ability to model a view of how you think your private equity managers might call and distribute cash, at the same time as looking at the portfolio liquidity for your marketable assets, is really powerful for our clients as they think about their liquidity and cash projection needs.”
The endgame for investment strategies is return, but the starting point is decision-making – which strategies to pursue, which investments to make to achieve the institutions goals, and so on. Investing is, in fact, an endless series of analysis and decisions – but there’s a potentially expensive and inefficient gap created by the time required to mold data into a story that allows a decision to be made. Sophisticated asset allocators want to capture all of their data – structured and unstructured – across the lifecycle of an investment and in decision-ready form, thus eliminating that gap.
“The challenge around decision ready data can’t be underestimated,” says Pickett. “The data that flows from alternative investment managers comes in completely different formats, at varying times, and is presented with different levels of detail and granularity. On the asset owner side, every organization looks at its portfolio through a unique lens. What we’re now able to do for our clients is combine technology and data management processes to integrate all of that information flow and enable clients to access decision-ready data that is comprehensive, timely, accurate, customizable, and delivered back to the client in their preferred format, whether it be reports, APIs, or an Excel plug-in.”
Along the same lines, Northern Trust’s newly upgraded FOS allows for research management that goes well beyond the industry standard. The approach encompasses contact information, referential data on investments, storage of marketing, legal, and accounting documents, and performance information from asset managers. The system also keeps track of meetings, call notes, and interactions of all types with asset managers. With the Northern Trust FOS resource management tool, asset owners can integrate all of that with portfolio management.
“For example, the investor can look at a capital call or a distribution and immediately see a document that the manager sent explaining the activity. Our clients receive hundreds of documents a day from all of their managers, and now they can be automatically tagged through a client-specific machine learning module and referenced to specific areas and actions of the investment process,” says Pickett.
Another tweak that investors can make to the research management process is to customize the properties they track on each of their investment managers. Using a timely trend as an example, asset owners can track the diversity of the employees at their investment managers, as well as the diversity of the owners of a GP or a portfolio company. “Once that customization is tracked within our system, our clients can calculate performance, risk, and exposure to managers based on their diversity levels, as an example,” says Pickett. “Then that information can be pulled through stakeholder reporting or while they’re doing portfolio analysis.”
All of this innovation is aimed at completely redefining and reimagining the investment experience for asset owners. Today, investors receive most documentation about their alternative investments in PDF format, which barely utilizes the potential of that information. Pickett and her colleagues have leveraged Northern Trust’s investment in machine learning and AI to create capabilities that allow its operational teams to automatically procure documents from investor portals, tag those documents to the managers, portfolio companies, and people who are referenced in the documents, and pull out operational information, such as capital calls and distributions and NAV information automatically.”
“We’re currently working on a solution for pulling both operational data as well as investment data like portfolio companies from private equity statements,” says Pickett. “There’s a significant amount of untapped data in the documents investors receive from alternative mangers, but it can sit idle unless there is automation and digitization around these business processes. We’re focused on providing asset owners with faster access to the data that is being delivered to them today in PDF, and to making their lives easier any way we can.”