The merge between investment management and investment operations
Benjamin Page-Fort, Director GTM Strategy, SimCorp and Gregg Lutz, Investment Strategist for American Equity, explore the differences and commonalities between the front and back office.
Sara Benwellposted on Tuesday, September 26, 2023
Today’s investment management organisations need to be agile to take advantage of new opportunities. They need to be innovative, and able to explore and onboard new asset classes in the ongoing hunt for yield. Equally, customer service is a growing differentiator and clients expect more reporting – often in real time.
This puts pressure on investment management teams, who must be laser-focused on making the right portfolio decisions quickly. It also adds stress onto operations functions, who may find that reporting requirements are taking up more time than ever, pulling them away from other critical activities.
To be truly agile, front- and back-offices need to work in harmony towards the same goals. This means breaking down siloes and understanding the commonalities and differences between operations teams and portfolio managers. Firms must find the lowest common denominator between the two and use that as a starting point to create a rich, governed process that makes sure portfolio visibility, strategy and execution are all top priorities for the organisation.
One frustration common to both groups is inaccurate and disorganised data. Whether you’re speaking to portfolio managers or accountancy teams, everyone agrees that up to date, clean and accessible data is critical to the successful operation of an asset manager or insurer. Both need a single source of truth for success.
A siloed front and back office, with disparate data and manual processes can have catastrophic impacts for a firm. Whether it’s reputational damage because millions have been sent to a wrong account, or regulatory risks because portfolio managers are making trades based on incorrect positions – the consequences can be severe.
There are opportunity costs too. If teams aren’t working in harmony, towards a common goal supported by the same underpinning data, that means they’re losing time that could be otherwise spent on value-added activities.
To further discussion on this topic, Contributing Editor Sara Benwell spoke to Gregg Lutz and Benjamin Page-Fort as part of a new report.
Sara Benwell: Where do the needs of investment operations and investment management overlap? What are the similarities between the two?
Gregg Lutz: I tend to think of two main areas – trade clearing, and security information accuracy for surveillance reporting and accounting.
On the trade clearing side, you have things like custody management, investment book of record (IBOR) accuracy, cash management etc., but those are the two big buckets where the front office and the back office have a common desire for quality.
"People want to know how much income they have, what losses they’ve made and how much book value they’re amortising."
The front office is typically buying assets for a client or an institution. To meet customer needs, they need to keep track of what they’re doing. Trades must be cleared appropriately and custodied correctly. That requires good data.
The next layer is the wider securities and portfolio information to take care of the assets that have been bought. That’s the kind of data that helps surveillance, whether it’s analytics, security master information for reporting categorisations, risk management and so on.
Finally, teams need to do client reporting. Everything must be accounted for. People want to know how much income they have, what losses they’ve made and how much book value they’re amortising.
Benjamin Page-Fort: Gregg’s point is exactly right. The interchange between the operations functions and the data that they provide and monitor, and the investment teams has gone from an end of day, end of month, end of quarter exercise to an almost real-time activity.
"The middle office is asked for more than just monthly and quarterly reporting to their clients who may be external or internal."
If you have multiple asset classes with different levels of liquidity and reporting, it becomes much harder to get an idea of what pre- and post-trade cash and compliance looks like. How do I know what I can do on the trading desk if 30% of my portfolio is illiquid and I have cash held away for capital costs?
We’re seeing an evolution where a risk management function, which used to be a mostly middle office enterprise task, has now moved closer to the desk because it’s a trade-to-trade exercise. The middle office is asked for more than just monthly and quarterly reporting to their clients who may be external or internal.
The full version of this interview is featured in “Convergence Point: Improving Operations and Technology to Support the Execution of Insurance Investment Strategies”, which is published in conjunction with SimCorp and can be downloaded here.