Performance Measurement: From Cost Center to Business Driver

At TSAM Boston, panelists highlighted how the ongoing evolution of the performance measurement function—enabled by technology—is creating a competitive advantage for those able to meet the growing data demands of investors.

Richard Flokos, Performance Product Owner

Recent research from Chestnut Advisory Group, published in November, emphasized the central role of performance reviews in helping asset managers secure lasting relationships with their clients. Even when performance suffers, the report concluded, informed investors are more likely to remain as long-term investors when the connection to broader market conditions is clear and communicated in advance.

This takeaway speaks to the organizational shift occurring within many investment firms, as performance measurement and risk teams are increasingly being viewed, not as a cost center, but rather as an elemental driver of the business at large. This was the very topic that we addressed during a recent panel discussion at TSAM Boston. The consensus among the assembled participants was that as performance teams begin to assume more prominent roles, their value is being recognized both internally, by other operating areas and the front office, and externally, by clients demanding more granularity and color around returns.

According to the Chestnut Advisory Group research, which featured a survey of nearly 90 asset owners and consultants, institutional investors today are particularly focused on performance data that can shed additional light on portfolio positioning, detailed attribution, and outcomes relative to strategy benchmarks. The timely delivery of performance data was also cited as a critical element of performance reviews by nearly three fourths of the investors polled. Less important, according to the survey, are the macro outlooks of fund managers or discussion around the best- or worst-performing positions.

The research underscored the importance of performance data to support client reporting and communications. In the same way math teachers expect students to “show their work,” asset managers today are being asked to provide clarity and understanding around how their specific investment processes translate into consistent and repeatable returns. The intensifying scrutiny into the drivers of performance also helps explain the elevated role of performance measurement and risk teams within the organization.

As one of the panelists at TSAM highlighted, investors do not want to think of a fund as a black box, particularly when it comes to more complex investment strategies such as quant-driven funds or certain fixed income products. Data quality is also critical. Client reports that previously might have shared two or three data points around a particular strategy are becoming more dynamic and interactive as client-facing teams access more granular and detailed data. The caveat, however, is that the data must be right.

Another panelist echoed this point, highlighting that in the past the performance team might have contributed one slide to a 100-page client presentation. But as performance data has been tied into middle- and front-office functions, they are now providing client-requested analytics and metrics that are specific to each investor. In turn, this growing dependency on performance data has only helped the performance measurement and risk team better demonstrate their ROI to the larger organization.

Underpinning the transformation of the performance function—beyond the growing demand for such data—has been the technology. As many larger investment firms have transformed their back- and middle-office operations, the transition from data silos to a single central repository has both improved the quality of data and created new efficiencies that enable value-added analysis.

Five years ago, for instance, most organizations operated a patchwork of multiple performance systems, requiring manual inputs and spreadsheets to consolidate performance data. As a result, the panelists noted, the performance function during this era was largely confined to reconciling and scrubbing data. Today, however, performance solutions can automate everything from workflows to data enrichment and validation. The more advanced solutions can also offer features such as on-demand portfolio calculations, customized benchmarks, FX and fair-value calculations, composite hierarchies, and ex-post and ex-ante views of performance and risk.

Not only can these types of capabilities ease the demands being placed on performance teams, but also they empower fund managers to position the performance function as a true differentiator in a competitive market. As one panelist noted, institutional investors are only becoming more sophisticated, both in terms of how they craft their asset allocations and how they consume and leverage performance data to inform their investment decisions.

Fund managers unable to provide the depth and granularity necessary to meet these heightened data demands are increasingly at a disadvantage to those who can. And the difference between the haves and the have-nots will only become more pronounced as technology continues to advance. As such, if performance measurement does not serve as a business driver whose ROI to the organization is self-evident, it is likely becoming a liability that will make reporting and client retention that much more difficult over time.

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