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Part 3 of our Integration Ecosystem Q&A with Alan Schneider, Partnership Sales Director, FundGuard
“Truly transformative, almost futuristic.”
That’s how a recent and insighful Citisoft report describes the ongoing changes to the performance management space — and we agree that while seemingly futuristic, key advancements to performance measurement are not so far off.
Today’s financial services organizations are recognizing the value of an optimized investment accounting process to power the complete back-to-front investment management workflow — and this week, Alan Schneider sheds light on the reality of so-called “futuristic” performance measurement possibilities and how FundGuard can accelerate that future state vision today.
FG: Modern data capabilities continue to broaden the scope of investment accounting and performance. As we will cover in this post, there are multiple points of view on best practices in performance measurement — but can we first begin by explaining FundGuard’s approach to integrationg with Performance Books of Record (PBORs)?
AS: A portfolio’s performance is what ultimately allows asset management organizations to sell their capabilities and attract assets. Further, portfolio managers rely on timely and accurate performance metrics to earn their compensation.
FundGuard’s data processes and structures uniquely enhance PBOR production.
The way we store and capture the minute details of data allows us to generate a tremendous amount of detail that is well-suited for feeding performance measurement metrics. Additionally, FundGuard’s real-time ability to capture and process information ensures and maintains accuracy for reporting on both Fund and the underlying portfolios’ performance for the manager’s benefit.
FG: A recent Meradia article describes PBOR as the “ultimate intersection” of a firm’s data infrastructure, and investment performance as an “enterprise data function in disguise.” What are your thoughts on this and can you explain how investment performance and data management have become so intertwined?
AS: The Meradia article you’re referencing brings out many great points that highlight this union of investment performance and data management. Let’s start by looking at this quote:
“A Performance Book of Record, PBOR, is a superset of all the data that enables performance analysts to answer the tough questions of lineage, explain small differences across accounting basis (ABOR vs IBOR, for example), and uncover the true sources of alpha for a given strategy. Doing so forces it to tackle normalization, cleansing, and filling important gaps that make each organization unique.”
What’s most important to note here is the crucial role performance measurement plays in asset management processes. As the most critical, end of process manifestation of a portfolio’s result, Performance measurement activities suffer from the issues within the preceding processes. These issues may be due to front-office OMS activities or middle office event processing, and will further carry to the complications of preparing investor statements.
Accuracy is a necessity within the performance measurement process.
In today’s advanced investment landscape, the performance process has become all the more vital for uncovering data and data management issues — and, very often, those issues are related to peripheral data coming in around the portfolio and the investment accounting system.
At FundGuard, we support greater performance measurement by producing timely, accurate and fit for purpose investment accounting data. Our capabilities help with data management not by figuring out the processes for correcting errors or managing processes as optimally as possible, but by manufacturing trustworthy data from the start.
Additionally, FundGuard’s API first approach to connectivity allows modern performance engines to use the accounting data without the cumbersome data transfer and replication in typical performance system implementations. A performance engine can read the required data, do its calculations and then need only retain the results, further streamlining the process and data lineage supporting the reported performance.
Whether it’s one of our partners or clients leveraging these capabilities, FundGuard ensures that the relevant data flows into other systems with assurance and clear lineage. We provide the tracking capabilities needed to gain trust and use this data in the downstream process.
FG: Portfolio Management Research recently published a performance analysis that examines the complexities of alternative assets, such as digital assets like cryptocurrency, as well as private asset classes. One clear theme from this analysis is the need to alter “critical facets of the traditional performance measurement framework to handle the unique attributes and challenges associated with alternative investments.”
Can you expand on this idea and discuss how FundGuard supports such attribution integration capabilities?
AS: The Portfolio Management Research report offers a great use case by highlighting the difference in a time-weighted rate of return (TWR) versus a money-weighted rate of return (MWR).
To summarize, TWR isolates cash flows to reflect the activities of a portfolio manager and MWR captures the perspective of the investor. The report further states that while TWRs are calculated using compounded returns between a specific set of valuation dates, MWRs “explicitly consider the size and timing of cash flows, reflecting the impact of an investor’s decisions on the investment’s performance.”
Both TWR and MWR have situational advantages, making it crucial to know which one to leverage.
On a basic level, portfolio managers leverage MWR calculations to meaningfully use and control the cash flows coming in and going out of the portfolio. This is typically used for illiquid and hard assets (like real estate, private equity, or ventures) where the funds are structured in a way that gives greater control over when money comes in and when money is distributed.
Meanwhile, in the typical mutual fund when portfolio managers do not have the ability to affect or influence cash flows are better represented by TWR calculation.
At FundGuard, our system is uniquely capable of tagging and managing information in a way that facilitates integrations with the performance and attribution calculator. Additionally, the FundGuard system labels the data so that it knows how to trigger the right calculations in specific scenarios.
FG: In the past, performance measurement has been treated as a static process, informing how organizations approach performance and attribution. With advanced, real-time data capabilities now becoming more widely available to back-end management teams, as well as for performance and attribution systems, how is this impacting performance measurement?
AS: Today’s reality is that organizations need real-time, dynamic measurement and analysis processes.
Traditional performance measurement is seen as static due to the infrequent nature of reporting — an organization may look at its data and insights once a month and then report to its stakeholders.
Comparatively, measurement and analysis processes that are dynamic and use real-time data provide portfolio managers with continuous benefits of knowing their performance and attribution. It’s no longer necessary, nor desired, to wait for the end of a period or for a deadline. Instead, portfolio managers can monitor changes to investment accounting information and their performance day-in, day-out, and in real-time.
For example, in dynamic attribution scenarios that require TWR, portfolio managers need the ability to perform this calculation on a daily basis or dynamically. Moreover, they need it to reflect whether or not cash flows or returns are moving through segments based on how the portfolio is managed.
To achieve this, the key support needed is real-time, underlying, detailed investment accounting data.
FG: As noted in the Citisoft report, we have seen a shift away from ABOR and toward IBOR for optimizing performance and attribution processes. How is FundGuard helping organizations navigate this shift from ABOR to IBOR, especially in regard to maintaining accurate performance measurement?
AS: Many consider ABOR alone to be unfit for demonstrating the fund’s rate of return, whereas IBOR can provide more directly correlated and real-time views of performance and attribution.
Europe and Asia, in particular, have traditionally leveraged ABOR for performance and attribution purposes. However, as asset managers around the globe begin to recognize what is missing from their performance measurement, and to engage with alternative assets, the need for better processes that can handle these assets properly is clear.
FundGuard provides the investment accounting environment needed to ensure highly accurate and timely data for the performance measurement process.
Additionally, we offer crucial support for multi-factor attribution. FundGuard tracks data at the granular level and applies tags to the portfolio data so that the data is properly segmented and allowed to be attributed to various factors that might be at play in the analysis process.
Ultimately, our real-time nature enables better data management, performance measurement, and attribution integrations.
Through real-time data capabilities and a focus on timeliness, FundGuard is playing a vital role in the advancement of performance measurement.
Not only can FundGuard produce ongoing results on a daily basis but our solution can also enhance PBOR implementations with a strong stream of investment accounting information. Reach out to FundGuard today to discover more about our cloud-native, AI-powered investment accounting platform.
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