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Leo de Bever is waiting for a plane to Amsterdam in the Toronto airport. Like many of his fellow travelers, the head of the Alberta Investment Management Corporation (AIMCo) has full internet access via his iPad. But he’s doing something with it that few asset owners can do from their corner offices, much less an iPad in Toronto Pearson: viewing his portfolio in real time.
“It’s risk exposure; it’s a current outlook on the markets; it’s your current asset mixes,” AMICo’s CEO/CIO describes, as he navigates through AIMCo’s $70.8 billion worth of investments. “The system shows you where we’re making money and where we’re losing money. Most funds have something like this in a printed form, but that’s not dynamic—it comes out every quarter, at best.” AIMCo’s system is nothing if not dynamic. In fact, that’s the name of the sovereign wealth/pension fund’s mobile data management platform: the Dynamic Dashboard.
De Bever commissioned the first iteration of the system a few years ago. AIMCo itself is only four years old—the assets had previously been managed by the provincial government—and de Bever saw the dashboard infrastructure as a key element in transforming the fund into a professional and high-performing corporation. “A couple of years ago, we were trying to bring together all of the information that’s relevant for getting a full risk snapshot at any point in time,” he says. Dutch pension ABP “had some pages in a report detailing their system. From this we said, ‘OK, this is roughly what we need,’ and based our prototype on that.” AIMCo hired an IT consultant to guide the process of bringing in a bespoke system, and continues to work with the same consultant today. Deputy Chief Investment Officer and de Bever’s right-hand man Jagdeep Bachher knows the system intimately and works alongside the consultant to tweak it to their needs. For instance, the investment team found they weren’t taking full advantage of the dashboard’s up-to-the minute capabilities. So Bachher stepped it up. “We have increased the frequency of gathering the most important information in real time,” he says.
These dashboard systems are not “set-it-and-forget-it” operations. There are a few common elements among institutional funds successfully deploying them, and conceiving of the platforms as processes—not product—is one of them. For one thing, the latest systems aren’t even tangible in the sense of a Bloomberg terminal. They are wireless, cloud-based, and mobile, accessible 24/7 from anywhere with internet access. Furthermore, the well-tended platforms are constant works in progress. Bachher and de Bever have been finessing AIMCo’s Dynamic Dashboard over a few years, taking it from a monthly printout to iPad-and-airport friendly.
Financial data management systems have a much longer lineage, however, and at least one cutting-edge institutional dashboard would be old enough to drink at this point.
“I joined the company in 1991 as a prop trader, [and] the group was already using Barra software. We were running it in DOS, and it could handle input for 500 securities at a time, using two floppy disks,” says Greg Williamson, CIO to BP’s $50 billion in pension assets. “We needed to build a platform to conduct portfolio analysis/risk management. At the time, there was nothing available, so we built our own. We code-named it Octopus—it has many tentacles, you see, reaching into risk management, governance oversight, document management—basically everything. We still use it today, with many upgrades and changes.” The Octopus system has even outlasted the company that built it, Amoco, which was bought by BP in 1998.
Over the course of a couple of recessions, stock market crashes, and a “liquidity event,” Williamson has seen financial IT evolve in response, and is adamant about trying to head off the next crisis via technology. That said, he’s also seen enough to be realistic. “The system also allows us to conduct scenario analysis, and to answer the ‘what if?’ questions of stress testing. It gives us a view on an aggregate level if we have any unanticipated exposures. But one of the things about scenario analysis: nothing you run as a simulation will ever come to pass in real life.”
Williamson acknowledges that updating models is typically a barn-door situation: you only know that you need to close it because the cows are gone.
“No one added alpha in ’94—we were just wrong,” he recounts. “People started to discount the time frame of a recession. No database had five-year expectations built in. Back then we were using CRSP [Center for Research in Security Prices] tapes from the University of Chicago. The only winners were the firms with internal fundamental securities analysts who made their own long-term earnings projections.”
Four years later, digital data failed finance again (or is it other way around?), and once more the sting of losses motivated more advanced systems. “In ’98, it was a liquidity scenario, which came about because people were levered into losing investments. People were selling everything—good bonds, commodities, strong equities—to pay for the bad investments. It was a nine-times liquidity event, which no one’s model predicted. They do now.”
Decades of tweaks, upgrades, and overhauls have left BP’s open defined benefit and defined contribution pension funds with a top-notch, totally mobile, and highly secure dashboard.“We can access Octopus from anywhere around the world, from any machine. And given how much many of us travel, we do,” Williamson says. But mobility does not entail a security risk—at least if you do it right. “Our system is very secure. I won’t get into it—for obvious reasons—but let’s just say it’s not found under BP.com.”
Despite Williamson’s enthusiasm for Octopus and the team of three in-house staff that runs it, he admits that he would trade it in for an off-the-shelf solution—if such a thing existed.
“If someone offered the software to do all of this, I would buy it in an instant.” They don’t, he thinks, so he doesn’t.
Over in Switzerland, it isn’t just the scientists hunting for the ‘God Particle’ at the European Organization for Nuclear Research (CERN) who are technically enabled. Their CHF3.8 billion (US$4 billion) pension fund has its own claim to innovative technology.
This year, the fund announced that it wanted to keep a closer eye on what was going in and out of its portfolio—and most importantly: how and for how much. “CERN is the home of the world’s largest particle physics accelerator, built and operated with cutting-edge technologies,” said Nicolas Salomon, head of middle office and treasury at the CERN pension fund. “Our ambition was to raise the pension fund operations infrastructure to the level of excellence that is characteristic of CERN’s scientific and engineering activities.”
The fund partnered with TradingScreen, an independent provider of trading, liquidity, and investment technology, to implement the new system. CERN now has access to trading and transaction costs and can drill down into any potential discrepancies. Gone are paper statements, remittances, and printed confirmation emails, for the CERN fund is on its way to total automation. It is also looking at improving its straight-through processing options—something only just becoming standard in the asset management sector.
That CERN is a pioneer in automation should not come as a surprise to anyone tracking the pension fund’s progress over the last three years. Working with its custodian, the CERN fund has created a system where it strikes a net asset value (NAV) for each of its accounts each and every day—again, something that is not yet standard across the fund management sector.
A presentation by the fund in September this year claimed: “CERN Pension Fund is now considered as a benchmark when it comes to daily NAV Calculation for institutional investors.” Digging into the detail it is hard to disagree.
Some two years earlier, the CERN board had approached one of its custodians requesting greater transparency and granularity regarding the investment portfolios and investment overall. It wanted to be able to measure performance across all asset classes and it thought it could do so using one combined custodian and fund accountant. The board chose State Street.
Along with striking the daily NAV, the project involved expanding the number of accounts the pension fund ran from 17 to 99 to provide greater transparency for performance and risk; rigorous and continuous monitoring of these accounts and transactions therein to spot any errors or discrepancies; overseeing the fund’s currency hedging overlays; and an online portfolio tool that allows instant access to investments for ad hoc queries.
In the September presentation, State Street said the project had pushed the custodian “to the ‘next level.’”
As European pension funds become more self-contained in terms of investment management and in-house technology, it is likely CERN will be seen as a pioneer in the industry. Some in the insurance business, which relies less on external providers, have already taken the step. The Zurich Insurance Group, with $200 billion in assets, was one of the first in the sector to tool up and take control of its own middle office. Tom Rogers, head of strategy implementation in investment management at the group, told aiCIO: “In the 1990s we built our own data warehouse system, which allowed us to see at any point what our exposure was. We wanted to move to an asset-liability matching model and realized we couldn’t do it without knowing the risk from all our offices in all our portfolios.”
Zurich’s proprietary monitoring system, which has been upgraded over time, pools all the information from its two dozen international investment offices and gives a clear view at any given moment of the insurer’s position.
Zurich, CERN, BP, and AIMCo all share something else in common besides their embrace of technology: They’re more or less incredulous that other major institutional funds still rely on quarterly or annual paper statements.
“Just think about the number of positions in an institutional portfolio at any point in time,” BP’s Williamson says. “We have over 10,000, and you want to know everything about them everyday. You can’t do that by hand. You need a system.”
Regulatory burdens do vary among funds, giving each its own specific requirement. The SEC wants all the details on swap- and derivative-heavy portfolios like BP’s, while the Alberta Government pretty much leaves its investment management corporation alone to do its thing. But even for them, just having an eye on their assets is invaluable.
“For me, it’s an integral part of what we do,” says de Bever. “It is worth the money.”
—Leanna Orr & Elizabeth Pfeuti