The wealth of experience

Colin Morrison has an impressive list of credentials to his name. He is in demand as a industry consultant and at the front of advances in performance measurement standards. He is a member of the IMA Investment Performance Working Party, UK primary member of the GIPS Council, member of the GIPS Interpretations Committee, and co-chair of their GIPS Alternative Investment Strategy Working Group. He spends three or four days each week in London before escaping back to Scotland to his home at the foot of the Ochills in Perthshire.

Morrison originally started out as a civil engineer where he was responsible for the positioning and installation of oil production platforms around the globe. The stock market boom times of the early '80s enticed him to leave the engineering world and apply laterally some of the techniques, principles and experience within private client fund management. Eventually he found this too restricting and moved into the institutional world. "Private clients struggle with the concept of relative performance. On the way up they use the FTSE 100 as their benchmark, on the way down a building society account; institutional clients think profoundly differently."

After 22 years first managing then analysing funds, he has amassed a wealth of knowledge and experience. Having held a number of senior roles in performance and risk, Morrison decided to "go it alone" at the beginning of 2006. Since that time he has consulted for a number of organisations. This has not only deepened his experience, it has also provided broad perspective of all that is going on within the industry.

According to Morrison, the reason some view performance measurement as something of a black art is that there is a preoccupation with the perceived purity of the mathematical approach to performance and attribution, and not enough practical application of the principles. The basic mathematics behind performance are not complex but it is his belief the industry seems to torture itself in this regard.

"Some years ago I remember speaking at a conference where I said one of the threats to our industry was the intrusion of academia. In focusing on the mathematics we risk losing sight of what we are trying to achieve. The fixation with maths also fails to recognise that many of the underlying accounting principles do not carry the same level of precision."

It is these broad principles that can be extended beyond performance measurement into portfolio analytics. "While some may think there is only a superficial difference between the two there is a vast difference in the respective output. Many houses consider performance measurement as a simple commodity where success is measured by the number of funds delivered accurately, on time and in a format required by the client. This misses a colossal opportunity since a fully functional, equipped and resourced performance team can do so much more than be a production engine to feed the client reporting process."

Elaborating further, Morrison goes on to suggest - in an analogy in keeping with his engineering background - that risk and performance traditionally have an orbital relationship, whereas ideally they should be related hemispherically. "In layman's terms, risk and performance have a direct relationship and one isolated from the other is only of limited use. The majority of investment houses structure departments such that the performance is operational orientated whereas risk is front office facing, the disconnect between the two is obvious to see. More enlightened houses recognise the advantages of being able to take a bilateral view and structure teams so the analytical output combines both disciplines. Interpretation of performance and attribution results constitute real value, as does linkage of ex-post analysis with the investment process to identify the success or failure in portfolio construction."

When asked about opportunities within the industry, he explains there are many opportunities for talented individuals. "The last 12-18 months have seen unprecedented circulation of talent, even now there are several senior posts unfilled. It must be flattering for those individuals with the right skills and experience to receive so many headhunter calls. And demand has not been exclusively been driven by the large asset managers: mid-tier and particularly boutique houses have been soaking up scarce talent as they recognise the need to be able to articulate the performance of their sophisticated alternative products.

"In many respects this is also where the challenge lies for the next 18 months. Traditional managers have fully embraced derivatives and alternatives, this will put unprecedented demands on performance teams to accurately analyse these products and strategies.

"While the analytical and reporting focus will naturally be on the performance team, the reality is that the problem lies earlier in the information supply chain as many houses find derivatives and alternatives difficult to accurately price and monitor. What hope the performance team if we don't have the basic data?"

Morrison articulates the frustration of many in the industry with regard to software.

"Industry software generally lags market direction and development by several months, the current performance measurement offerings are no exception. Five years ago we spoke of the need for bond attribution solutions, yet only recently do we see systems capable of generating discrete bond analysis. Vendors cited lack of consensus regarding analytical approach, yet why when there is no single attribution answer for equities did they expect there would be for bonds? Now having delivered up solutions, the exponential increase in the use of sophisticated instruments and strategies, coverage is now a significant issue. What use is having four or five bond models when your system lacks the ability to analyse all the instruments within your portfolio?"

He points out that most performance systems have also been developed with rigid classification hierarchies and structures that lack the flexibility to deal with more complex analytical requests. This makes the transition from measurement to analysis difficult, in effect they remain anchored in the ex post world as opposed to providing more front-facing almost ex ante type analysis required by the investment floor.

All this leads to the topic of outsourcing. "Outsourcing appears to be a cyclical activity in that 10 years ago we got ourselves working into an outsourcing frenzy only to find the service offerings at the time did not match expectations. So we went in-house again. Second time around, more asset managers are willing to outsource more of their businesses. Typical of this is performance measurement where a number of outsource providers offer measurement services both to asset managers and asset owners. I think it fair to say that the notion of third-party measurement for asset owners is a well established practice but I think the jury is still out on how well these agencies satisfy the more complex demands of an asset management house. Key to this must be isolating the commoditised analysis required for regular reporting, then provision of tools and access to data to allow the manager to carry out more ad hoc and forensic analysis."

Experience is a word that keeps cropping up in conversation. To use a different, possibly more defining one, there is another word: maturity. Because the practice of performance measurement is not so different from the reality of life generally.

Theory is all very well but pursuit of the ideal - whether in mathematics or life - hampers the work of day-to-day life. To put it in human terms, you need to use lateral thinking to optimise assets, apply wit, imagination and curiosity to explore it fully.

When asked what the future holds for him, Morrison says: "Hopefully more of the same. There are always going to be bright young things who will be more than willing to wrestle with the mathematics behind our industry, this means that those of us that are at a more mature point in their careers can concentrate on applying these new techniques and ideas in a practical way so that they genuinely make a difference."