2011 Operations Survey: Calculating (And Reporting) Exposure to Risk is Paramount
September 26, 2011
Managers of U.S mutual funds, separately managed accounts and other asset pools are pretty concerned about whether they calculate their risk exposure and performance results correctly and report correctly to regulators and clients.
Those areas are also where likely to spend most of their operating budgets over the next year, according to the first-ever survey of fund managers just completed by Money Management Executive. Why? They are either not automated or “somewhat automated.”
That’s not exactly an ideal scenario for asset managers that can’t afford to make any operational errors. They must know just what is causing them to process a wrong payment, fail to settle a trade on time, miscalculate the value of their assets or send incorrect reports to investors and regulators. Also critical: understanding the potential for financial loss based on the types and values of financial instruments the fund manager trades and the strategies used.
Whether or not they accurately measured their risk topped the list of worries for fund managers at 72% of the 261 respondents to the survey distributed by Lodestar Research. Next up: how well they calculated their performance—at 68%. Sixty six percent of respondents were concerned about how well they managed client reporting, while 60% worried about financial reporting. Whether or not new customer accounts were opened correctly didn’t fall too far behind. Fifty nine percent of the respondents said they were concerned.
The category of operational functions giving fund managers the most angst matched up well with the level of automation in each functional area and where firms will spend the most money to improve over the next year. Smaller sized managers, those with under $500 million in assets, appeared to be far more concerned about accuracy and the potential for error. And rightly so. They are the least automated. As a result, they also scored higher than far their larger peers in anticipating their firms would spend more on technology in the same categories.
About 28% of respondents said that their measurement of risk was somewhat automated, and 12% said it was not automated at all. In the case of performance metrics, 26% of respondents said that they were somewhat automated. About 30% of respondents said they were somewhat automated when it came to valuation and financial reporting, while 31% said their client reporting is automated. Customer onboarding scored the highest levels for either not automated or not very automated—at a whopping 31%.
Just what does “somewhat automated” mean? Most likely a combination of completely electronic procedures and some manual intervention—aka calculations on an Excel spreadsheet.
So where are fund managers likely to spend money? Client reporting scored the highest. Thirty two percent of respondents believe they will invest in new technology to shore up their statements to clients, while 27% think they have to do so for risk management. Financial reporting followed at 26%, while valuations came in at 18%. Twenty one percent of respondents said they expected their firms to spend on automating the procedures for onboarding new customers.
“The priority is for these firms to ensure that their information is both accurate and transparent. You can expect to see firms continue to go the way of automation in an effort to meet both ever-changing regulatory requirements and the needs of clients and shareholders,” said Steve Lipof, practice leader for the compliance and regulatory unit of AlaS Consulting, a New York based financial services consultancy.
Not only do regulators want as much information as possible about fund managers’ performance but so do investors. They need to understand how well the overall portfolio is doing relative to industry benchmarks, where the highest returns are being made and how much risk the fund manager is taking. That risk reflects the probability of financial loss to a percentage of the portfolio due to market fluctuations or the default of a particular counterparty.
Investors also want data at their fingertips—on desktops and even mobile phones. End-of-day or next-day reports just won’t cut it anymore.
Yet despite their concern about accurate risk calculations, performance metrics and reporting, spending money on one overriding requirement—data—didn’t make the highest category. About 20% of respondents said they expect their firms will automate their processing of corporate actions such as income payments, tender and exchange offers, while 17% said they would do so for updating reference data—descriptive information on securities. Fourteen percent of respondents believe their firms will be spending more to automate their acquisition and distribution of counterparty data—information identifying their trading partners and customers.