Sophisticated institutional investors are managing an increasingly complicated array of public and private assets in their portfolios. Many organizations that once chiefly dealt with traditional securities and equities in domestic, global and emerging markets are rapidly adding public and private debt, bank loans, derivatives, private equity, real estate, and several other vehicles. Many of these institutions have both heavy internal trading components in addition to allocations to alternative assets. Naturally, differing organizations (such as pension funds) have varying obligations and regulatory concerns in managing these assets, which further adds complexity.
Unfortunately, many institutions can’t effectively meet these mounting responsibilities because they’re struggling with outdated, siloed operating models and data systems.
The history of the siloed model
This problematic working model emerged as institutions delegated the strategic allocation of asset categories to teams which operated independently. As the financial landscape evolved and new teams were added, their working models evolved along different paths that hewed closely to the needs and quirks of their individual niche.
“Ten years ago, many investors were primarily focusing on the public markets, equities and fixed income,” says Marc Mallett, Head of Whole Office strategy at Northern Trust. “But then, over time, they added derivatives and then allocations to alternatives in private markets. This meant their teams had to continually bolt on new capabilities from an operations, technology and data perspective to support those new asset classes.”
This evolution created artificial silos that had employees at the same organization using vastly different operational processes and data management systems. Whenever the organization’s leaders asked their tech group to process these motley data collections into a holistic view, they quickly learned that this is a costly, difficult feat. So many continued to make do with inefficient workarounds and spreadsheets – and still do.
“Due to these silos, the information that institutional investors are receiving at the whole portfolio level is too static and periodic to be actionable, and they’re coming to us and saying, ‘we realize this is untenable,’” says Mallett. Many know that if a major issue occurs (such as, say, in China), it will take them days or weeks to fully understand their exposures – and they need that information in minutes to effectively react to an urgent situation.
Moving to holistic, total portfolio management
To remain viable and seize opportunities, institutional investors well know they need to graduate from the obsolete silo model to a holistic, total-portfolio view that provides comprehensive insight into their entire portfolio so they can actively manage it in real time.
“They still want to delegate day-to-day allocation work to the separate teams,” Mallett notes, “but they want the additional capability of getting timely and accurate views of performance, exposure, and liquidity risk for all investments across the entire portfolio so they can make more active, immediate decisions in investment strategy.”
Of course, liberating data from legacy silos and weaving it into a new platform that provides a comprehensive, portfolio-wide view is a challenging goal. It requires sophisticated uses of technology, innovative data architectures, and deep planning that anticipates developments and needs in the coming decade.
Past initiatives to create a “data warehouse”
Over the years, with vendors or internally, institutions have attempted to create makeshift solutions that sought to normalize the information across their silos and process it into something resembling a comprehensive portfolio view, Mallett says. Many firms got about one-third of the way through these expensive “data warehouse” projects before abandoning them and going back to disseminating spreadsheets, he notes. “That leaves everybody frustrated, because after a lot of cost and effort you end up with a sneakerware solution rather than a true enterprise software solution,” he says.
The problem with most of these initiatives is that they attempt to create a new depository of combined data and then add yet another new team to consolidate and normalize that copied information. In essence, it’s just adding another costly silo – one that’s responsible for reporting – which fails to address the root problems in the firm’s data management.
The solution: Graduating to a Total Portfolio View
“You need to bring those data sets together at the operational level, and the way you operate your investment book of record needs to mirror the way you actually want to run your fund,” Mallet explains. Northern Trust offers a solution called Total Portfolio View (TPV) that empowers institutional investors to accomplish this.
TPV is a holistic investment data-management solution designed specifically for institutional investors. It provides a shared platform that integrates data into one system, streamlining operations and simplifying analytical and reporting functions to enable faster and more informed decision-making.
TPV achieves this by combining two of Northern Trust’s core platforms: Omnium and Front Office Solutions.
Using technology acquired from Citadel Technologies in 2018, Omnium is a best-in-class investment book of record and accounting solution for public markets and derivatives. “We now have over 200 developers supporting that platform and it’s a core part of our infrastructure,” says Mallett.
Later in 2018, Northern Trust made an investment in Parilux Investment Technology, LLC, the maker of market-leading software that performs a wide scope of operations, analytics and data management needs for sophisticated institutional investors. Tapping the technologies from Parilux allowed Northern Trust to develop its popular business line, Front Office Solutions, which offers a unified, cloud-based platform that integrates data from investment streams across complicated portfolios, including alternative assets.
“Fairly quickly after we completed those two transactions, we looked at those two platforms and we said, ‘This is pretty amazing – we have the two key components that are necessary to support a total portfolio view, and we just needed to marry their data sets’,” says Mallett.
Now, TPV is a fully outsourced solution that institutional investors can use to create a comprehensive view of their portfolio at a level that satisfies both their operational and investment needs, using Northern Trust’s platforms and service teams. “We can give the CIO, chief risk officer, and every asset class-specific team actionable views of the total portfolio, with a user experience that lets them easily understand exposure, liquidity risk, performance, cash movements and other vital aspects,” says Mallett.
Making the transition to TPV
To help institutional investors transition to TPV, Northern Trust begins by emphasizing to them that they truly don’t need to be constrained by the limitations of their existing operating model and showing them what’s possible, says Mallett. “There may be things that the chief investment officer or chief risk officer wants to be able to do, but they’ve come to believe that building those capabilities is just going to cost too much or take too long, or that there probably isn’t a viable solution out there,” he says. “So, our first conversations focus on really understanding how they want to manage their total portfolio and generating ideas for how to better manage their funds, because the transition to TPV is really about changing the approach and strategy in how funds are being managed.”
For firms considering other platforms being sold as comprehensive portfolio management solutions, Mallett cautions investors to vet them thoroughly. Chiefly, he explains, they must ensure that the features devoted to private markets and alternatives aren’t just older, retrofitted technology. “If you look at the history of these platforms, you’ll find that many were public market systems that are now being pushed into private markets and alternatives,” he explains. “The reality is, their architectures were never designed to do that, and it will create new problems because it’s trying to force a square peg into a round hole.”
For another red flag, Mallett cautions institutional investors to note any mention of processes that sounds similar to the “data warehouse” initiatives many firms have already tried over the years. “It’s a warning sign if they’re trying to combine data from multiple systems to address your problems,” he says. Direct questions will surface this: Does the process involve replication of data? Or data being input twice? Is information being copied or moved around? Are we reconciling the same information between systems? Do the source systems have completely different data models? If the product you’re considering requires any of the above tasks, it’s likely not a suitable solution.
“Having one source of data, for every type of asset and every position, is core to the design of our TPV solution,” says Mallet. “There’s no need for massive reconciliations between systems, and that’s critical for avoiding errors and making the solution reliable for your end users as well as scalable.”
Choosing the right transition partner is key
Given the consequences of implementing a new platform that could ultimately fail to solve key problems while creating others, choosing the right partner is a pivotal step in making a successful transition from a legacy silo system to a holistic portfolio solution. Waiting is no longer a tolerable option for most institutional investors, as the risks of missing a vital opportunity or not pivoting quickly enough in an urgent situation – because they don’t have the modern infrastructure in place to get the right information to firm leaders and their investment teams at the right times – are growing too severe as more competing entities graduate to comprehensive data systems. While Northern Trust created its TPV solution to simplify the lives of institutional investors and help them thrive, its design is focused on meeting the current and future needs of the true end beneficiaries in the ecosystem: retirees, students, charities and other important populations and entities.
“If, for example, you are allocating money on behalf of teachers, police, firefighters, and other public sector workers, their retirements can depend on the institution’s ability to manage data effectively – and that’s incredibly important,” says Mallett. “Our goal is to play a positive role in helping the institution manage that money to ensure the end beneficiaries have an opportunity to enjoy a fruitful retirement.” Given this, being a partner and building a long-term relationship are key priorities for Northern Trust in empowering institutional investors to graduate to TPV.
Learn more about implementing Total Portfolio View.
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