A growing number of institutions are asking their in-house investment teams to take on a larger workload in managing and allocating assets in complex, global multi-asset class portfolios. A lack of fee transparency on the part of some outside managers, and the opportunity to eliminate some fees and expenses entirely, have contributed to the trend. An additional source of motivation is increased control.
“In-house management allows for more control around the liquidity of your assets, better transparency into what positions you’re holding and what’s being traded,” says Melanie Pickett, Head of Front Office Solutions at Northern Trust. “You can also more easily control steps you take toward specific objectives. For example, if you want to supersize a specific position, or stay away from a particular segment or sector of the market, you’ve got much more control doing it in-house.”
Challenges abound
Human resources and time are the two often cited hurdles to increasing the amount of asset management that is done in-house, but many institutions also lack a key component of the potential solution to those challenges – namely, the necessary technology infrastructure.
“The market has struggled to build an investment book of record that is suitable for these large, diverse, multi-asset class portfolios,” says Pickett. “As a result, many institutions do not have an order management system [OMS], an execution management system, or an investment book of record – not to mention pre- and post-trade compliance tools.”
A lack of technology infrastructure can be acutely felt when alternative investments are among the remit of an in-house investment team. As asset owners explore more sophisticated alternative strategies, they might enter into co-investments alongside their general partners, for example, making direct investments in private companies or directly holding private debt. The farther out into the alternative spectrum, however, the greater the potential risk to the organization. For example, co-investments often have no more than 10 days – and sometimes as few as three days – advance notice for an asset owner to complete thorough due diligence.
Monitoring alternative investments might be an even more onerous responsibility for in-house teams. After all, getting an alternative deal done is one thing – but they must live with that asset for up to 15 or even 20 years. “Even if it’s just seven years, that’s a long time to ensure that the [alternative] manager is still a viable entity that is achieving the investment objective they set forth with you, and to ensure they are compliant with your limited partnership agreement, and all relevant regulations,” says Pickett.
As alternative investments become more niche – say a direct investment into farmland – and general partners less involved, resources are stretched, risk increases yet again, and the burden on the in-house team grows immense.
Innovative solutions emerge
It is noteworthy that prior to joining Northern Trust, Pickett spent her entire career working at large, complex asset owners with quite diversified multi-asset class portfolios. Her goal when she joined Northern Trust was “to build the platform and body of services that I wish I’d had access to as a client and asset owner – specifically, a portfolio management solution for the front office that is fully multi-asset class, rather than having separate systems for each of the asset teams.”
What Pickett and her colleagues at Northern Trust have developed, in conjunction with an equity investment in Parilux Investment Technology LLC, is a technology-driven, true multi-asset class solution that provides in-house teams at asset owners with portfolio accounting, performance, risk, exposure, liquidity, document management, and customer relationship capabilities, as well as an enhanced work flow.
“It’s highly customizable,” says Pickett, “and a very fit-for-purpose, single platform for asset owners and the investment offices.”
The solution is holistic, however, and includes the provision of timely intra-day and daily data that is prepared by audit professionals who have a deep understanding of the alternative space.
The data model itself is meticulously constructed to include exposure, fees, and expenses in liquidity terms. This more complete body of referenceable data requires a highly-expert level of service.
“In our research, every client said they spent more time managing the data than actually analyzing it, and that the relationship between the amount of time they spent collecting, aggregating, and cleansing data was inverse to the amount of time they wanted to be spending on those tasks,” says Pickett.
A first for Northern Trust
The service model provided by Pickett and her team leverages some of the same principles of a model that has proved extremely successful in Northern Trust’s work with asset managers, with the net result that it complements the technology solution while removing routine data management from clients’ plates.
In a first for the firm, access to the solution and services for in-house investment teams is not contingent on the client having custody with Northern Trust. In other words, says Pickett, “We’ve built a full diagnostic solution that allows clients to pull assets and liabilities – which may or may not be custodied by us – onto the system. For the first time, they can see a fully aggregated view of their enterprise liquidity. The whole organization is much more in control and has greater visibility into all of its assets without needing a massive pile of spreadsheets. In general, fewer systems is a good thing for everyone from the perspective of productivity, training, and job satisfaction.”
And greater control in investing is a goal everyone can embrace.