Schroders ensures timely data flow for clients

As private banks and their clients become established as significant buyers of not only funds of hedge funds but also single-strategy hedge funds, how can their needs best be met by fund service providers? Clearly, the needs of private banks go way beyond simple fund valuations, as they need to ensure investors’ comfort levels are maintained and that information flows to them are timely and accurate. Many private banks have struggled to keep up-to-date with the technological requirements of their customers. As a group, they have been slow to implement systems to support clients and customer service. At the same time, it has been important for them to keep an eye on the technology needed to administer and analyse portfolios. But Rupert Robinson, managing director of Schroders Private Bank in London, thinks technological difficulties can be reduced simply by running an exclusively discretionary service. Schroders does not need to employ the same level of interactive technology that a fund supermarket or advisory firm would need to, says Mr Robinson. “The technology used when dealing with product providers and end clients must be regarded as a jigsaw but not all parts of the overall picture need access to all of the information,” he says. He splits the bank’s technology processes into three: dealing with asset allocation decisions, making the actual investments as a result of those decisions and then presenting performance and related data to clients. When it comes to clients, clearly the onus is on the bank to have the right technology in place to provide support and efficient reporting. All clients receive a “comprehensive” quarterly report, detailing valuations, a transactions schedule plus details of any dividends, coupons or interest payments. They can also request more detailed or more frequent updates. Customer relations Customer relationship managers also have remote access to the bank’s proprietary systems, so that when they are out on the road, they can show clients how it all works in terms of making asset allocation and underlying investment decisions. But Mr Robinson is keen to point out that in a situation where clients are investing for the long term, they should not be examining their portfolios on a day-to-day basis and that the whole idea of having discretionary management is that the bank should be the one scrutinising the portfolio on a more regular basis. He contrasts this with a fund supermarket or brokerage model, whose clients have a fundamental need for daily access to decision-making tools and then the facility to trade online. “Obviously we are happy to provide any additional information. But, in general, clients are happy to leave the details to us and are instead interested in headline performance. It always comes down to balancing enough detail with information overload, all while remaining efficient and profitable,” says Mr Robinson. Unfortunately, things are not so straightforward on the investment side. Clearly the bank’s responsibility is to make appropriate asset allocation and investment decisions and then to monitor its portfolios to make sure that they are first performing and secondly not straying too far from the risk return profile. This is simple enough to do when the portfolio’s holdings are all vanilla, but with the advent of funds of funds, hedge funds, structured products and venture capital, then the task becomes more complex. “Asset allocation tools have taken on increasing importance in recent years, as getting this part of the investment process right in the first place is key to delivering good performance,” says Mr Robinson. Schroders has defined its expected future performance for each asset class and then analyses the risk surrounding each one, from cash right through to private equity and commodities. Mr Robinson says: “We have an expectation of how each asset class behaves on its own and also in relation to each other and the way we do it is using our own in-house system called Smart.” Smart, Schroders’ multi-asset risk tool, allows “optimal strategic asset class mixes” and aims to allow the adviser to input various investment objectives, such as risk and return profile, from which the system provides the optimal asset allocation. But Mr Robinson warns that Smart technology does not take into account cyclical economic factors, or other factors that could have an impact on how a particular asset class will perform. “The strategic allocation process assumes that an asset class is trading at fair value but at any given point in the economic cycle we need to determine which asset classes we should be over- or underweight in,” he says. Turning to the portfolio, the next step in the allocation process is to decide which underlying investments make the best fit for the asset allocation decisions. For this, Schroders has a long-established proprietary system called Prism (Portfolio Risk Investment and Strategy Manager). The system basically allows the bank to assess whether the various holdings of a particular portfolio combine to meet its asset allocation objectives. It also allows the bank to look at whether its individual funds are investing according to their stated mandates, and thus meeting the asset allocation decisions made for a particular client portfolio. “What we basically do is load a fund’s holdings into Prism and then look and see how its characteristics and risk exposure look by analysing factors like tracking error, beta, its growth or value or other bias,” says Mr Robinson “This decomposes the various levels of risk in a portfolio and so we can look at the aggregate of all our portfolio holdings as well as the individual fund managers.” But the emergence of diverse investment vehicles means obtaining details of the underlying holding of any one fund has become increasingly important. Mr Robinson believes external fund providers in general have understood this, have updated their operations, and are now delivering, when it comes to providing underlying data to their clients, the private banks. Indeed, the biggest risk for third-party funds, says Mr Robinson, is that managers are very performance sensitive and, if their chosen style is not working in any particular market, it can be tempting to change the style bias to get better performance results. But he warns that quantitative analysis forms only half the picture and that qualitative analysis gathered from face-to-face meetings with the fund manager, remains just as important. “Transparency levels in the hedge funds world are unlikely to ever reach those of the long-only world. So, for example, we would need to know that x strategy being followed is sensitive to y market condition so that any performance spikes would make sense,” he says. With regards to the funds of funds side of the business, Mr Robinson believes keeping things simple is the key to successful analysis. “The role of the provider is to ensure that they have the right mix of managers. Our role is to look at the fund level and know that the provider’s chosen mix of managers will achieve what the provider tells us it will.” For hedge funds of funds, now the most popular entry route into this asset class, the theory is the same, with the bank examining which strategies are being used to give an idea of risk levels, whether the fund is highly leveraged and how much is invested in a single fund or strategy. “From an educated viewpoint, we are always looking to see whether the fund is sticking to its objectives,” says Mr Robinson. Mr Robinson is also clear where the bank’s responsibilities lie on the data processing side. “A fund of funds manager wants a system in place to allow redemptions and redeployments of assets, but that is his transaction, not ours,” he says. His view is that with the explosive growth in funds of funds, it is the product providers, rather than the buy-side, that have needed to raise their game to make sure technology needed to operate effectively is in place and thus to be able to reassure their buyers. Indeed, the relationship with third-party transfer agents and other administration services remains linear rather than a three-way relationship between administrator, provider and distributor, according to Mr Robinson. “It is almost a consequence of the supply-demand of the multi-manager industry and even the die-hards who would not previously be happy supplying information to their buyers have had to accept the new status quo,” he says. One area that Mr Robinson thinks will require attention is that of structured products. “The systems needed to manage risk and value complex derivatives within a client’s valuation report need to be looked at,” he says. “It is an industry-wide problem that is being much discussed at present.”

Robinson: required technology can be viewed as a jigsaw