Fixed-income investment managers are currently facing a major headache in the need to replace the long-established Barclays risk analytics, attribution and indexing product Point.
After the sale of the intellectual property that powered Point to Bloomberg in August last year for use in its Port portfolio and risk analytics system, Barclays committed to keeping its product in being only for a further 18 months.
As the clock ticks down to February 2018, about 200 investment management firms have been seeking an alternative. Some will simply make the change to Port, or a similar system, in order to obtain a like-for-like replacement. Others may well opt for a best-of-breed approach, picking and mixing specific solutions for different functional needs.
Neither of these approaches is without its drawbacks. An all-in-one solution does allow a firm to address various different needs all at once, but it is unlikely to prove the best answer to all those needs.
Meanwhile, a best-of-breed approach—while addressing this particular drawback to an all-in-one solution—brings a major problem of its own in that it is almost certain to drastically increase the total size, and thus the cost, of the project.
Finding a way out of this quandary involves making much better use of a resource that is right under the managers’ noses.
Before managers rush off to spend money on shiny pieces of new technology, they should ask themselves one or two pertinent questions. Who will be the users of the new system? What will they want from it? And which aspects will get the most use? What were the weaknesses of Point? How can they be overcome when we move to a new product? Need we replicate everything that it did? Can any of its functions be taken in-house?
These questions boil down to finding out what you want and what you need. There is very little sense in choosing a replacement before they have been answered. Those answers will vary from one firm to another, but some common themes will emerge.
First, while the traditional users of fixed-income attribution and information systems portfolio managers remain the primary users, they have been joined by clients, who increasingly demand transparency from fund managers, and by consultants and colleagues in the investment strategy and marketing departments.
Second, in terms of what users will want from the system, a survey by Citisoft, the investment-management consultancy, found that the most used features of Point are risk analytics (92 percent), performance attribution (82 percent) and scenario analysis (75 percent).
Whether this running order continues into the future will depend very much on the answers that are given in each firm’s case.
Linked to this is a third theme, which is that it really is not necessary to calculate attribution for every single portfolio. When it comes to fixed-income attribution, doing less is often best.
One final overarching theme that may well emerge from this process of questioning is that the de-commissioning of Point, while doubtless frustrating for fixed-income investment managers, may well be a blessing in disguise. Indeed, it is a golden opportunity for a complete re-think of data strategy and the impact it may have on the future of performance measurement and those responsible for it.
Central to this re-think is the role of those very same performance measurement teams. It is our view that the time has come for them to step out of the shadows and emerge as a fully-fledged partner of the front office.
Currently, performance measurement is largely segregated from the attribution function, which rests with the portfolio-management team. This makes little sense, given that fixed-income attribution is essentially a matter of oversight (in which performance measurement teams are well skilled) in which an accurate measure is sought of the risks and the associated returns.
Validating data and exercising quality control over the results is something in which performance measurement staff are highly experienced. Furthermore, with clients increasingly seeking consistency, transparency and accuracy in both attribution and performance measurement, it is only logical to combine both functions on the same desk.
The present segregated system can often lead to clients being presented with two quite different sets of returns, one from the front office and one validated by the performance-measurement teams. That is hardly calculated to meet client expectations of transparency.
Linked to the possibility of uniting attribution and performance measurement is the opportunity that the loss of Point provides to re-assess the desirability or otherwise of a single-source provider of index data and analytics, and attribution tools.
To sum up, the looming retirement of Point creates a space in which firms can take steps that will, we believe, make them better aligned with the wishes of their clients and thus more efficient as businesses.
Specifically, involving the performance measurement in the attribution process will ensure consistency between performance returns and attribution, and improve a firm’s overall risk measurement and performance.
