Performance Measurement and Risk Management Starts with Good Data

Marc Rubenfeld, CIPM, Head of EMEA/APAC Solutions


Last week I chaired my second iPARM forum in Sydney, Australia. The forum is dedicated to the subject of performance measurement, attribution and risk management and featured speakers such as Kyle Ringrose from superannuation fund QSuper and Naresh Subramaniam from National Australia Bank sharing their views on some of the challenges their industries are facing.

The topics discussed over the two-day event were far reaching, spanning regulation, risk strategies, long horizon investments and tax strategies.  The potential for performance measurement, attribution and risk management is great and represents a new frontier of opportunity for the financial services firms that are able to take advantage.

For my opening remarks, I created the following word cloud to illustrate the performance and risk challenges attendees are facing based on the content in the iPARM program.

The underlying theme for the forum was ‘data’, and the solutions for the majority of issues discussed started with the need for firms to be in control of their data. Long underappreciated as a strategic asset, data is becoming increasingly recognized as the cornerstone for a whole range of business objectives including meeting regulatory requirements, managing risk, achieving scale and driving profitability.  The firms that fail to recognize this do so at their peril.

dataTo this end, I presented the audience with a second word cloud illustrating the vast amount of data they need to manage to be successful.

Below are a few of the issues that featured prominently at the forum and are shaping how investment companies in the region are using performance.

  • The Australian Prudential Regulation Authority (APRA) is increasing the risk reporting and fiduciary responsibilities of financial institutions.  Earlier this year, for example, it announced a new package of governance measures for banks, and general and life insurance companies. The measures, which come into effect on 1 January 2015, require more detailed and comprehensive risk management frameworks with a greater degree of documentation and reporting.
  • Long Horizon Investment Performance (LHIP) is a popular topic in Australia, which has a large and growing superannuation market (employer contributions to these funds is set to increase to 12% of employee wages in the coming years). As a result LHIP continues to evolve and may play a bigger role in improving investment outcomes.
  • Firms are increasingly looking at after tax performance, especially the benefits of franking credits, leading to new tax efficient strategies.
  • The performance and risk functions in investment companies are merging. This is a trend that was identified some years ago but is now becoming a reality as firms realize that performance and risk are different sides of the same coin.
  • Attribution is becoming more sophisticated as asset owners are increasingly looking to achieve a better understanding of sources of returns across asset classes.
  • Alternative investments, particularly infrastructure, real estate and private equity, are growing in popularity; this introduces new challenges when reporting performance and risk.

The ability of firms to respond to and capitalize on these trends is predicated on having the right data available and being able to leverage it. For example, being able to measure the performance of a portfolio that includes different types of assets such as real estate and equities requires datasets that can be integrated.

The role data has to play in performance measurement and risk management cannot be underestimated. It is arguably a business’s most important asset after its employees; firms are re-writing investment strategies and reshaping entire business models based on their ability to leverage it. The most successful investment companies will be those that can unlock and harness its potential.

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