AsianInvestor, the premier publication and online source focusing on asset management and Asian capital news for institutional investors, published an interview with Elske van de Burgt, Managing Director Investment Performance and Stefano Seung Jin Lee, Managing Director Australia & New Zealand, on How to decompose complex portfolios and return.
The asset allocation matrix is becoming more complex as investors look for new sources of returns beyond traditional asset types. How can investors measure and maximise returns in compounded portfolios?
Elske van de Burgt, managing director investment performance at Ortec Finance, and Stefano Seung Jin Lee, managing director Australia & New Zealand at Ortec Finance, explain how investors can resolve challenges posted by complex portfolios.
The increasing complexity in portfolios is considered by some institutional investors as one of the biggest challenges in their asset allocation. Why is this happening?
A combination of different factors results in this increased portfolio complexity: rates have been low for a prolonged period so investors have been looking for new sources of return, mainly in private assets. At the same time, there is an increased risk perception for inflation. And the rise of environmental, social and governance (ESG) metrics to make portfolios more resilient also increases complexity.
It is challenging for investors to get to grips with the various asset classes and the roles they play in the portfolio. They can find it difficult to maintain oversight and look at the bigger picture. From a technology perspective, it is also important to ensure the risk and performance solutions are able to keep up with a more complex portfolio.
How can investors cope with this challenge?
It is important for investors to have a holistic approach that aims to balance their strategic objectives and investment approach. Investors need to ensure the added complexity serves the purpose of meeting the required investment returns and that the extra amount of risks taken remains within their tolerance band. In our view, scenario analysis is a very strong tool to find the right balance and it allows investors to actively monitor the risk tolerance. The higher complexity nowadays also results in more requirements from tools such as modelling capabilities of private assets and climate risk.
A continuous monitoring process is needed to ensure that the strategies employed do not deviate from the investment policy statement, that risk limits are not exceeded and the required returns are delivered. So it is very important to have sophisticated scenario models and to have strong performance attribution tooling that is able to deal with increased complexities.
So, despite efforts made by investors themselves to make sense of return, it is becoming more crucial to assess the exact return of the investment strategies taken. How difficult is it to determine the return break-down of a complex investment portfolio?
Ortec Finance’s approach starts with the belief that fund performance is driven by bigger picture decisions such as the strategic asset allocation and a host of other investment decisions. To make an accurate assessment, it is critical to start with a clear picture of what investment decisions have been made and who are responsible for them. This may look difficult if multiple people are responsible, for example, if the board and external consultants together determine the strategic asset allocation and the rebalancing policy. Then the added value of this step should be split between them according to a pre-determined weight.
Getting a full picture of all investment decisions is a very rewarding exercise. Ortec Finance’s software has been built around breaking down investment decisions. Once defined, investors can start to measure and attribute the added value of each investment decision and assess its effectiveness on a case-by-case basis. Another benefit is that this breakdown of decisions made can also enhance the forward-looking risk models.
What benefits can PEARL, which is Ortec Finance’s performance attribution solution, bring to investors regarding the increasing proportion of alternative assets in investment portfolios?
The main challenges of private asset investments include stale pricing and the availability of limited data. At the same time, the role these assets play in the overall fund performance is increasing and hence it is necessary to enhance reporting qualities
Currency exposures are an important driver of fund returns and hence the management of the currency dimension takes an important place in the investment decision process of institutional investors. The majority of our clients prefer to manage this dimensio
ESG is on everyone’s agenda right now and developments are succeeding one after another very quickly. It is a very broad topic, and Ortec Financ
Another key application is to assess the impact and effectiveness of ESG policies. Client requirements are shifting, where they no longer only want to gauge the impact on return, but also on the ESG metrics themselves. That’s why we initiated a research project with an ESG data provider to come up with new approaches for assessing the impact of engagement activities.
The above article was published by AsianInvestor. Find the article here.