System Workarounds When “Good” Isn’t Good Enough

By Barb Shegog

Investment managers’ lament: there are no good systems for risk and reporting.  

One of the many lessons learned from the credit crisis was the importance of risk and reporting systems. Over the last few sessions of The NeuGroup’s Treasury Investment Managers’ Peer Group (TIMPG) meetings, we found ourselves repeatedly asking the same question: Is “good” good enough when evaluating operational systems?

This refers not only to measuring the risk in the portfolio, but also to the increasing demand for management reporting. Management wants to see what is at stake and what the impact is to the portfolio under stressful scenarios. This is all new for many managers of high-quality fixed income portfolios; after all, fixed-income mistakes mature. In other words, past thinking had it that there was very little concern on losses for AAA-rated securities because eventually you would get your money back.

Despite the importance and the role compliance monitoring and risk management play in the investment portfolio, members rarely rate their systems or process higher than good. So it again all comes back to the same question, Is “good” good enough when talking about any system? A frustration shared by so many is the lack of that perfect solution. Equally frustrating is that that solution might never be created and if it does, it will never be rated “excellent.”

In the TIMPG each member has a unique combination of systems that ultimately allow him or her to end up where they want to go. And most agree that there is always room for improvement and that no system is perfect. With that in mind, members have over time shared their tricks of the trade or how they have pushed vendors to bringing their system closer to perfect. Here are a few below.

Compliance. The credit crisis reinforced the need to vigilantly monitor risk and compliance. To do this you have to feel that your custodial and accounting systems are giving you accurate data. Very few members rated their compliance system as excellent, yet a compliance breach could mean real money lost.

• Compliance begins with a consistent interpretation and a thorough knowledge of the Investment Policy. This includes educating the investment directors, managers, traders, and analysts.
• Stopping violations before they occur. In a perfect world the system will stop anything purchased that is out of compliance. Given the different cash flow volatility and security characteristics.

Custodians. Changing custodians is not fun. Many members dread a switch so much they stick with the status quo. Also, members are not convinced that there is anything better than what they have.

• Most members consider their custodian as average or very good, giving their custodian a 3 (average) or 4 (very good) rating. Members are loyal to good customer service, as indicated by the fact that this was the most-liked response. The chief complaints about the custodians were lack of security knowledge and mistakes.
• Selecting a new custodian need not be an overwhelming task. Regular communication and a more formal evaluation process with your current custodian can help improve the relationship. Always remember, the best custodian could very well be the one you are not using.

Analytic Systems. The lack of robust analytic systems is why so many members continue to use Excel as their “proprietary analytic system.” The appeal of Excel is that one can download data and manipulate it or combine data from multiple systems.

• Exploring Bloomberg PORT might be a logical next step for members that have found their analytics capabilities are not up to the task. Most members already have Bloomberg, and the basic version of PORT is currently free.
• Center investment philosophy on risk allocation and then determine the absolute levels and sources of risk in the portfolio.

No matter what system was being discussed and for what use, it was agreed that there is no perfect system. One key takeaway from the peer group meetings is members gaining insight on how other members use the same system. Clever tricks, workarounds and tools are gained from each other. Members found that pushing your vendor to provide more or better information, combining methods or systems, or involving and educating other internal groups might be enough to move the needle from good to excellent.

This ultimately means that a lot of emphasis needs to put on how to use systems to monitor risk; in fact that emphasis could equal the effort put into the research that’s performed to find that next greatest security for the portfolio. If you do, the next greatest thing my might be a great new reporting system.