Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Consolidation, private markets fuel demand for whole-of-fund view
Both asset managers and the asset owners that they invest with are updating their investment platforms as they turn to the private markets to fuel business growth and generate strong returns for their members, according to Jack Dahlstedt, global head of Alpha sales and solutions at State Street.
“Twenty years ago, if I was sitting here with a $50 billion client – an asset owner or an asset manager – they would be in a pretty safe position,” Dahlstedt tells ISN. “Today they’re not, and they have to think about how they can grow, and a lot of that growth is looking at alternative asset classes that aren’t in their portfolio today.”
That – along with a “huge drive” towards greater efficiency across everything from investment functions to the back office – means there’s growing demand for a whole of fund view to get a grip on their exposures and provide better look through of what in some cases might be decades of siloed information.
“Traditionally, the way the industry grew up was when you spun off a new asset class you would’ve pieced together a set of tools to support that asset class, and most of the time it would never be brought together with other asset classes,” Dahlstedt says. “Private market assets were managed by their own group and had their own reporting, and I’d argue that the compliance area would always have a challenge trying to bring the data together.
“Both growth and consolidation are drivers of that; with consolidation you might end up with two parts of a firm that in the past never really touched each other, and the growth trajectory of private assets is overwhelming compared to public.”
Some of greatest demand Dahlstedt sees is for analytics and historical investment data that can be fed back to internal and external investment teams to help inform their decision-making. That’s easier to get than it used to be, but making it accessible is another thing.
“If you look back five or 10 years at where clients were in their evolution, they usually had very disparate data sets; data was in all different parts of the organisation and the most difficult part was bringing it together,” Dahlstedt says.
“Now we’re talking about bringing it together and that’s not the hard part anymore – it’s creating a model for that data that will allow them to consume it in a really efficient manner, so that when somebody who isn’t a technology person or programmer but a business user wants to find some information they can get it very quickly and get it to the investment professional who needs it.”
