Emphasis on data quality

If you were to look at any recent set of performance measurement statistics for UK pension funds, you can clearly see the changes in investment themes that have challenged the performance measurement industry over the last 25 years. Complexity has increased, aided and abetted by the number of managers, not to mention mandates, being utilised by end clients. For example, the move from balanced mandates with ‘acceptable risk levels’ via one manager, to a specialist approach via multiple ‘best of breed’ managers is bound to present with more labyrinthine attribution. There has also been a decline in equity exposure and greater equality between UK and overseas splits. Then fixed income exposure is markedly increasing – as are ‘alternatives’. Global Measurement Performance Standards (GIPS) has loomed large on the scene, presenting its own set of trends and diversions.

You need look no further than the PARM (Performance Attribution Risk Management) 15 conference in November to track the direction of sector’s focus. Main topics on the agenda include:

- the future of performance measurement;

- hedge funds;

- outsourcing;

- alternatives;

- fixed income / ‘advanced’ attribution;

- risk measurement;

- …and obviously, GIPS.

The list is, of course, ultimately much longer and each topic has implications for our working day. In addition, the ‘cosy’ quarter-end peak and trough of the distant past is well and truly over. Month end ‘reporting’ is now driven by daily calculations. Daily data is becoming the norm.

Whether we are talking about a basic total return for GIPS purposes, a detailed drill down on equity/fixed-income attribution, deriving the appropriate notional exposure or even the terms and conditions for OTC derivatives reporting, there is a consistent and continued theme. In our industry that theme is data quality. An effective working partnership with our colleagues who ‘own’ or provide this information is critical to ensure the correct maintenance, supply and enhancements to meet the needs of performance, risk and compliance reporting. But how do we do this? What are the most effective measures?

As a provider of third-party asset servicing, Northern Trust see a consistent message coming from both the asset owner and asset manager client base. Ultimately they want timely and accurate information irrespective of whether they are a small UK local government pension fund or a large multi-asset investment manager. The frequency and delivery mechanisms may differ, but the base need is always the same.

Given this, and the move into asset classes which, by their nature, make it more difficult to deliver timely and accurate analytics, then our jobs remain ever more challenging. Educating the end client about the implications and challenges of delivering high quality and timely performance and risk reporting on OTCs, for example – and ensuring enterprise-wide solutions are developed to meet those needs – is a critical part of any performance measurement function.

There is no doubt the demand to deliver performance and risk analytics faster and more accurately is seriously being challenged by the new wave of instruments our clients invest in. But to go full circle, one should surely consider at what cost is accuracy compromised by the demand to deliver more frequently? And is it a price we can afford to pay?