By Ted Meissner, CEO of Ledgex
Every day – across investment offices, foundations and endowments – a flawed process is repeated. Accounting and investment pros struggle to collect timely, up-to-date information that will enable their firms to manage diverse portfolios and make better, faster decisions. And every day, the results are the same; an inability to quickly verify and audit sources, accompanied by discrepancies and a lack of confidence in data.
What’s needed is greater data transparency, after all, even the most sophisticated data analytics won’t make a difference on the bottom line if the information can’t be trusted. Yet, this hurdle may finally be crossed by a technology approach that brings together accounting and investment books of records (ABOR and IBOR).
In doing so, workflows could be streamlined, and new data insights unearthed, providing portfolio managers with more relevant information and time to manage assets, thereby creating greater value for their customers.
It’s about time
Gathering quality multi-asset data is labor-intensive and requires workarounds because it comes from third parties using different timetables and formats, such as fund managers and outsourced accounting firms. For instance, while there are some incredibly smart minds behind hedge and private equity funds, the way they communicate with their investor base is often via PDFs, which they routinely modify to include custom information.
This can thwart data gathering tools, so investment firms must undertake a painstakingly slow manual roundup and entry process, which also raises the likelihood of errors. Even those few firms that have adopted optical character recognition encounter issues that erode data confidence. Adding to the confusion, this information is supposed to be used for multiple purposes, and when you have staff importing and re-keying details into various places, data silos are going to form.
When you’re operating within silos, almost by definition, tasks are duplicated and ongoing reconciliation is needed. Unfortunately, many functions and individual leaders keep their own spreadsheets and don’t share the numbers. Data can also get trapped in specific software applications for accounting and reporting analytics, and there’s common information that they should be sharing.
It’s all about time, literally. There are only so many staff hours to accomplish things manually – yet there’s also that need for more timely data to support better decision making. Even when markets are stable, if reports that assess portfolio performance arrive weeks after the close of the month, that lag can result in missed opportunities.
If financial markets are relatively stable, this delay might be tolerable, though not ideal. However, as market performance becomes more volatile – which can be prompted by things like political unrest, a pandemic and social upheaval – these lags can prove to be extremely costly.
In the shadows
While many investment firms have their own accountants, a good number outsource this function. So, debits and credits are getting booked externally, whether by a custodian or third-party administrator. Problems arise because external third parties don’t always have a clear understanding of what form the data should take – and sometimes the client doesn’t know either.
As a result, clients get frustrated when their accountants can’t provide the data they require when they urgently need it. They complain because they struggle with reconciliation and feel compelled to double-check the work.
Unfortunately, some decide that instead of working with the custodian to make sure the work is done correctly, they create a shadow system. Basically, the client redoes everything the third party custodian does, which is massively inefficient, but deemed necessary to ensure they have confidence in the results.
Still, this creates even more silos, resulting in even more inconsistent data across a firm. COOs and CFOs get frustrated because they don’t understand why departments are failing to use official, approved tools. Inefficiency snowballs, costs grow, integration issues arise, all of which can now be avoided.
Recent technology developments are giving hope to asset managers by offering the potential to process and analyze preliminary and estimated information along with final accounting data. With the possibility of combining ABOR and IBOR in a single solution, investment offices may no longer have to spend countless hours chasing and proving the quality of their data in order to make real-time decisions.
Data engine technology has the ability to record data once and intelligently deliver it to the appropriate downstream system for general ledgers, private investments tracking, as well as performance reports and analyses. Also, indexing can provide deep insight into the quality of data they receive, along with an audit trail. Based on stringent parameters and data points, it is possible for algorithms to analyze key data indicators and assign each piece of information a level of confidence.
Through this approach, estimated and final data can share the same report, enabling users to quickly gauge data dependability. Increased accuracy and order can support period-based accounting side-by-side with the best available performance data. Time-consuming reconciliations can be eliminated and shadow systems no longer required, even for such things as internal estimates. Plus, new data insights can be revealed, prompted by the ability to look at data in different ways such as time series and allocation prisms.
Most of all, teams can record transactions and market values when obtained and automatically stage them for review and approval for the entire office to use with confidence.
One for the books
This technology approach is driven by software providers who now have the capabilities to design solutions to ingest data in the most manageable way possible.
This, in turn, increases the likelihood of efficiency and minimizes confusion, ensuring maximum competence. Simply put, investment firms can give more attention to adding value instead of focusing on menial tasks.
It’s been a long time coming, but should this potential be realized, it could be one for the books for accountants and portfolio managers – a solution offering game-changing improvements in data accuracy, transparency and timeliness.
How to give your investment portfolio a Spring clean
By Alexander Joshi, Behavioural Finance Specialist, Barclays Private Bank
Spring is often a time of optimism and change, and in this spirit of the season, can be a time to review and refresh your investment portfolio, to identify risks and take advantage of new opportunities.
Periodically reviewing a portfolio is sensible, but so is making constrained and thoughtful changes for the long term. Investors should be looking at their long term objectives and making sure they are set up to meet these goals. Some steps to consider include:
- Review, but not too much
Periodic monitoring of portfolios can help identify potential investment risks or opportunities from likely longer term themes and ideas. Additionally, the market will always provide shorter term, tactical, opportunities should they appeal.
Making too many changes to a portfolio, however, can be detrimental. Market timing is extremely difficult. Furthermore, trading too much can introduce or exacerbate behavioural biases that can weigh on portfolio performance.
- Beware of trading too much
People have a tendency to be overconfident about their own abilities. In investing behaviour, overconfidence has been shown to induce investors to trade excessively, to the detriment of returns.
Psychological research demonstrates that, in areas such as finance, men are more overconfident than women. Using account data for over 35,000 investors, men have been found to trade 45% more than women. Trading was found to reduce men’s net returns by 2.6 percentage points a year and by 1.7 percentage points for women. Transaction costs were not enough to explain the reduction.
The return patterns can be explained by factors such as difficulty in evaluating the many stocks available to buy, distraction by outside sources such as the financial media and selling far more previous winners than losers. Moreover, market timing is a significant challenge for all investors.
- Problems of market timing
Trying to time the market can be risky. One reason people do this is explained by probability matching, in which subjects match the probability of their choices with the probability of reward when they vary.
Suppose one has to choose between two rewards: A that pays out on 70% of occasions, and B on 30%. The rational maximum-payoff strategy would be to follow the first option, which pays off seven times out of ten. The matching strategy consists of choosing A 70% of the time and B on 30% of occasions, which should pay out approximately six times out of ten (calculated as (0.7 x 0.7) + (0.3 x 0.3) = 0.58). The maximising strategy outperforms the matching strategy. However, most animals match probabilities.
When there is little chance of knowing the next result, the maximising strategy is the one that rewards most often. In terms of whether to stay invested or not on a monthly basis, historical data of investing in developed market equities suggests those that stay invested were rewarded approximately 60% of the time. Other strategies were unlikely to perform better.
- A random walk?
Financial markets are not entirely random. Indeed, there may be occasions when investing in or withdrawing from the market is justified. However, given how difficult timing is for even professional investors, it may be wise for short-term tactical tilting to represent a small proportion of a portfolio.
Large and frequent portfolio turnover is likely to underperform against staying the course with long-term investment trends. A core-satellite strategy may be a prudent approach when making opportunistic plays to enhance returns alongside an existing core allocation.
- Active management
While individuals may be subject to behavioural biases, having a portfolio managed by a team of investment professionals following a robust investment process is likely to reduce the impact of individual biases. Following a thorough investment process usually further reduces the impact of group biases such as herding.
Investors paying for active management may, understandably, want to see their money being actively managed to justify the fees. However, investing success is not just about what an investor holds, but also what they do not hold. Not investing in a sector or company tends to be an active decision.
A quality active manager continually assesses the investment case for companies in and out of a portfolio. As such, low portfolio turnover is not necessarily bad. What is usually more important is the process, the buy and sell rules or discipline, and a long-term objective.
- Actions you may want to consider
As part of an annual review, there are some actions which are often overlooked that investors may want to consider:
- Rebalancing – As the values of some investments rise and others fall, portfolio allocations can stray away from planned and create unintended over or underweights. Small reallocations can be used to take profits and rebalance portfolios while staying invested
- Diversification and hedging – Investing does not have to be a binary, in or out, decision. Thoughtful diversification and hedging instruments can help to stay invested while maintaining discipline and lowering beta if required
- Cash – As well as reviewing allocations, you may want to take stock of cash positions. Holding cash may seem like a passive choice. It is actually an active decision to not be invested.
For investors retaining cash for tactical deployment, the longer it is kept on the sidelines, the stronger the case for having invested due to the opportunity cost of inflation. The potential returns forfeited from waiting for more attractive entry points can be significant. Phasing in investments may help nervous investors, but while this can provide a smoother ride, it typically comes at the cost of lower returns than if the cash was invested immediately.
- Staying invested
When trying to meet long-term goals, getting and staying invested is likely to be the best course of action. The start of the year did not mark the end phase of the pandemic, as some hoped for. Such uncertainty might make it difficult to stay invested or put more cash to work. The start of the year is a good time to discuss such concerns with an advisor and put in place measures to allay concerns. Investing is like having a difficult conversation: it’s best not to hold off for another day.
ESG – how this new alternative data set delivers competitive edge
By Stef Nielen, Strategic Business Development, Alveo
Buy-side financial firms are increasingly looking to tap into alternative data sets, including rapidly emerging environmental, social and governance (ESG) data to give them a competitive edge. There are several drivers behind this.
First, regulation, and the European Sustainable Finance Disclosure Regulation (SFDR) in particular, forces funds to classify whether they are green; semi-green or not green as a first step and later on requires reporting against a certain number of specific ESG metrics (PAI or Principal Adverse Impact indicators). The second main driver is the demand to differentiate in the ESG space through new ESG investment offerings which requires integration of ESG data into the investment process. Other drivers include cost reduction through streamlined optimised data sourcing and user enablement through the timely provisioning of vetted data.
Ultimately, ESG data is capturing information around market externalities that will translate into a company’s Beta as a measure of the volatility, or systematic risk of a security compared to the broader market. The theoretical framework behind this notion is captured in the recent whitepaper ESG Addressing Challenges in ESG Data Management.
Scoping the challenge
Today, buy side firms are both being pushed and pulled in the direction of ESG data. Yet these organisations have become increasingly aware that the process of integrating and enabling such data in the decision-making processes is challenging.
On the one hand, ESG data is diverse and widely dispersed – even when sourced from the top ESG data providers – and to gather meaningful insight from it, it has to be combined with other data. Paradoxically, this proves that the challenge to empirically resolve a company’s ESG rating cannot rely on just one source but grows harder with the increasing number of disparate sources the organisation uses. On the other hand, many of these firms have come to realise that when a majority of organisations adapt to the same standard vendor ratings, it gets harder to differentiate.
Finding a way forward
To overcome this challenge, many firms have now chosen to augment a vendor’s classification and ratings data with raw ESG data, i.e.: the underlying data retrieved directly from a company’s official reporting or self-declaration. In doing so, however, buy-side firms often struggle to know where to start.
ESG matters are not just limited to discussing the broader objectives of society but can have a material impact on future cashflows and investments. The need for a structured approach to move into ESG-responsible investing and create the right portfolio is therefore imminent.
As a first step, firms should make an inventory of what data is out there. Whilst doing so one should take note that there is a tendency amongst the European asset managers to disregard most vendor scores and instead put more emphasis on the underlying content that drives these scores. In other words they prefer to use the raw data points and attribute scores themselves later.
Next, they should look for a practical solution that can help them manage and organise the data. It is genuinely hard for most buy-side firms to master all their ESG intelligence in a centralised way. It typically requires a lot of in-house data-development and does not easily deliver an acceptable return on investment.
Using a data management platform becomes the next step for organisations wishing to extract the best value from disparate data sources. A data management platform can bring these data sources together, normalise them to a common data model and overlay with a standard taxonomy as per the requirement of the portfolio managers for screening investments and the external reporting requirements as per customer or regulatory requirements. As such, across the organisation, all portfolio managers, trading desks and analysts will be able to leverage the data when easily available, properly structured and consistent throughout the firm.
Asset managers are well aware that they will struggle to deliver this capability and manage it in-house given the frequent change in the data and reporting space and the diversity of ESG data sources. Increasingly they are looking to go one step further and get a third-party vendors to deliver this data sourcing and integration capability for them.
Typically, this would be delivered by the development of an ESG data master, using the same concept as a security master for financial product terms and conditions. The provider would then implement all the tools around it to scale the master up from different data sources to make sure it links into the existing infrastructure of the asset manager or buy side firm.
Delivering ROI, Scale and Analytic Capability
It is key too that market data is organised centrally within a system that has strong analytic capabilities, can scale, and governs data lineage appropriately. But above all, it should enable business users to explore diverse data sets across all asset classes via an intuitive user interface and API, whilst giving access to a data environment that natively runs Python and R. Spreadsheets unfortunately can’t help here as they don’t scale and become increasingly slow and harder to manage when working with such large datasets and structures.
Once a market data management system as a centralised structure has been put in place, there are a plethora of benefits that will exist for an organisation, from data lineage, cost management and allocation, audit trail. This will significantly increase the return on any existing and future 24 data investments. Firm-wide availability will increase usage and, in turn, will benefit the whole organisation.
Individual desks can access data, manipulate it, and pass it back to the central repository, where it will be mastered, consolidated and become the single version of truth throughout the rest of the organisation. And if everyone within the company uses it, the scrutiny around the data and hence the quality will increase. Sharing the same data across the organisation, and contributing by improving the quality and internal assessments will, in turn, increase data ROI.
Exclusive: Ant investor Boyu Capital targets $6 billion for new private equity fund – sources
By Kane Wu
HONG KONG (Reuters) – Chinese private equity firm Boyu Capital, an investor in Chinese technology titans including billionaire Jack Ma’s Ant Group, is raising a new, China-focused fund targeting as much as $6 billion, three people with knowledge of the matter said.
Its fifth and largest U.S. dollar-denominated fund is likely to close in the near term, said one of the people, who declined to be identified as the information is confidential.
Boyu did not immediately respond to a request for comment.
The fundraising by a firm widely associated with tech startups amounts to a high-profile test of investor appetite at a time when heightened oversight of China’s tech giants clouds the near-term outlook of those companies.
It follows authorities’ November suspension of Ant’s Shanghai and Hong Kong dual listing, which delayed the hefty returns early investors such as Boyu could have expected from the world’s biggest initial public offering (IPO).
The financial technology giant was set to raise $37 billion at a valuation of $315 billion. Since the suspension, China has sharpened oversight of its home-grown champions which has also exposed their investors to more public scrutiny.
A central bank official said Ant’s IPO was suspended to safeguard consumers and investors. Ant has since agreed a restructuring plan with regulators, Reuters reported this month.
Boyu was founded in 2010 by, among others, Alvin Jiang, grandson of former President Jiang Zemin. The firm has offices in Beijing, Shanghai, Hong Kong and Singapore, and invests in consumer and retail, financial services, healthcare and media and technology sectors, its website showed.
It is known for its 2012 investment in Alibaba Group Holding Ltd which helped Ma buy back half of Yahoo! Inc’s 40% stake in the e-commerce firm, Reuters has reported
At $6 billion, Boyu’s new fund would be one of the region’s largest focusing on China. It last raised $3.6 billion in 2019.
Past investors include Hong Kong’s richest man Li Ka-shing and Singapore state investors Temasek Holdings Ltd and GIC Pte Ltd, Reuters has reported
https://www.reuters.com/article/us-boyu-capital-fundraising-idINKCN1QP0E2. The New York Common Retirement Fund has also been an investor, showed the website of the state comptroller.
Private equity managers in Asia raised $108 billion for 481 new funds last year, down 45% by dollar value from 2019, showed Preqin data, as the COVID-19 pandemic dampened fundraising.
Activity has picked up in 2021 with $21 billion raised via 56 funds so far, the data showed.
Boyu invested in Ant’s $4.5 billion fundraising in 2016 and $14 billion funding round two years later. In the interim, Ant’s valuation leapt from $60 billion to $150 billion.
The private equity firm has invested in other booming Chinese tech and healthcare startups in recent years that generated lucrative returns，two of the people said.
Portfolio firms include ride-hailer Didi Chuxing, artificial intelligence (AI) firm MegVii and live-streaming app operator Kuaishou Technology, according to media reports and public information.
In January, it participated in a $700 million fundraising by AI firm 4Paradigm, Dealogic data showed.
(Reporting by Kane Wu; Editing by Sumeet Chatterjee and Christopher Cushing)
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