The Proliferation of Data - Challenges and Opportunities
June 22, 2012
As regulators and investors impose increasingly stringent transparency and reporting requirements, asset managers face new challenges in all aspects of data management. Regulatory and investor demands are substantially altering the needs for data and effective tools and metrics, with potential significant implications on infrastructure and processes.
Simultaneously, increased margin pressure for fund managers, resulting in part from the current low interest rate environment and modest capital market expectations, has encouraged the growth of passively managed funds as well as alternative style funds. These innovative approaches also require new uses of data that can be costly to build, often requiring significant upfront investments in infrastructure and operations.
When all is said and done, the proliferation of data is both an asset and a challenge. Today's data-rich environment provides fund managers with information they need for portfolio planning, pricing, compliance, risk management and performance analytics. But at the same time, fund managers must be skilled in identifying the most relevant analytics for their business, as well as in maintaining, utilizing and normalizing a plethora of big data. These factors often drive fund managers to seek new solutions, such as utilizing an asset servicing provider to supplement their data and analytics' needs in front, middle and back offices. And the outcome yields benefits to a range of key processes.
Analytics as tools in the investment process
For fund managers, performance is one of the key metrics used by investors to benchmark an investment fund. Fund managers are also interested in performance attribution and analysis of individual investment manager performance. Given the recent evolution of product offerings to address emerging client needs, it is necessary to operationally support these new products and monitor their performance. That said, substantial amounts have been invested in performance attribution systems over the last few years. However, when assets are on specialized, disparate platforms, it is critical for the various groups to share a single framework and a consistent assessment process across performance measurement and risk management.
Another good reason for fund managers to adopt and monitor a set of fund analytics - with direct impact on investor appeal - is the rating eligibility of the fund. Ratings such as Morningstar or Lipper are established quality indicators for investors; scoring a high rating with these companies is therefore an important selling point. Fund managers targeting good ratings have to constantly monitor the underlying parameters.
Often, depending on the circumstances of the fund manager, the fund's asset servicer can be leveraged to provide a range of analytics, from the more basic performance measurement to customized benchmark creation and complex portfolio analysis, allowing asset managers to focus on their core competencies or managing assets and client relationships.
Analytics as tools for cost management
Although the asset management sector continues to enjoy some of the highest operating margins in the financial services sector, margins have been deteriorating due to pricing pressures and the shift of investor preferences toward low-fee passive strategies. As a result, asset managers have increased efforts to drive transparency on cost, which is often achieved through analytics. As the key success factors and core competencies vary significantly between providers of alpha or beta, the relevance of analytics also differs. For providers of beta, where operational efficiency is a key success factor, analytics are focused on execution capabilities (transaction processing metrics, breaks and errors, volume information, service level agreement compliance), often in monthly/weekly operational excellence reporting packages, sometimes supplemented with one-off analyses of cost drivers. Asset servicers share a similar focus on operational efficiency and process metrics analytics supplemented by strong client service analytics (response times, aggressive monitoring of service level agreement performance, and service costs by client category). For providers of alpha, portfolio and performance analytics remain the most relevant.
Recent market turmoil and its effects on investors have prompted not only increased supervision but also increased focus on additional opportunities to protect margins. Advances in technology enable companies to collect and process massive amounts of data in ways that truly support decision-making at a firm level, giving access to quick critical information in a highly volatile market environment. Such analytics may have direct benefits on operating margins and are therefore worth the investment required. Selecting a service provider to support that effort is determined by their established infrastructure, capability, capacity and efficiency in processing and reporting on vast banks of data in an environment where risk control is at a premium.