Milestone Group’s Asset Allocation Technology Survey explored the requirements, practices and challenges of institutional asset allocators. Among the headline findings was that the world’s largest and most sophisticated institutional investors still rely on spreadsheets and a fragmented collection of systems in their asset allocation investment process.
The front office orientation of investment offices exerts strong influence in favour of technology that supports ‘traditional’ portfolio management: the management of those mandates, portfolios and products that are the underlying components upon which the asset allocation investment process is performed. Therefore, the organisation often ‘bequeaths’ those systems to their asset allocators, rather than selecting one that is purpose built.
The consequence would seem to be that the asset allocator and the middle office that supports their investment process are left to make do with whatever technology the organisation already has. That is ironic, or so it seems to us.
Asset allocation is unchallenged as having a first order effect on investment outcomes. That primacy extends to the implementation and execution of those asset allocation strategies, and everything that supports that investment process. This is true for commercial organisations such as Outsourced CIOs and delegated solutions providers as well as large asset owners.
The asset allocation investment process is distinct from that of managing the underlying portfolios and products. The asset allocator operates as a manager of managers from the perspective of ‘the total portfolio view,’ adjusting the allocation to underlying investment mandates and products. If the asset allocator’s organisation also manages portions of the total portfolio in-house, that part of the organisation is, in effect, a ‘sub-advisor’ fulfilling a mandate for the asset allocator, just as an external manager or fund product would.
Our observations inform us that asset allocators often – even typically – rely on spreadsheets and legacy platforms that were designed and originally selected for the management of portfolios of direct securities and have been ‘re-purposed’ for use by the asset allocator.
If one acknowledges that first order effect of asset allocation on the investment outcome, then it is imperative that asset allocator be given priority in setting the organisation’s technology requirements and selection. However, that technology selection criteria, even for the asset allocation investment process, seems to be strongly influenced by the familiarity and availability of technology that is already ‘in-hand’ in service of traditional direct security portfolio management.
It is this mismatch of technology to the asset allocator’s requirements that has necessitated the development and ubiquitous use of spreadsheets to perform many critical functions for the asset allocator that are not contemplated by those traditional portfolio management systems.
Nevertheless, our survey found that the asset allocator’s technology requirements are rising in priority, and with them, those of the middle office and investment operations that support their investment process. The greater focus on the requirements of the institutional asset allocator will shift the ‘desired state’ to be a robust platform that is purpose-built to provide a complete and coherent view of the total portfolio as well as the ability to transact from that same perspective through a unified and user centric experience. This will favour technology that is conceived, engineered and built specifically for asset allocators as managers of the Total Portfolio.
Our certainty about this shift arises from the obvious paradox posed by that first order impact that asset allocation has on investment outcomes when contemplated in the context of its relegation to spreadsheets and legacy platforms, urgently motivated and amplified by both the risk of the status quo and the reward of a proper purpose-built solution.