In this 2-part series, we will take a closer look at the function of investment control and provide recommendations for investment organisations on how they should approach this critical role.
In this first part, we will take a look at:
Confidence and Trust in Data – a framework we utilise here at Investment Control Systems to gain trust and confidence in your investment data.
Working with your Custodian and Maintaining Independence – maximise their commoditised services while focusing on your competitive advantage.
Investment Control is the monitoring function that provides an independent supervisory role to manage the quality of investment portfolios, ensuring that quality is passed to the end client, or member.
Traditionally this has been focused on areas such as investment performance and compliance.
We see this is extended further to key activities like Data Management, including verification and validation, and the subsequent storage and access of those normalised data sets for downstream analysis & reporting, including the report production process, albeit using modern tools such as data grids and business intelligence applications.
The main basis of this article is assuming an outsourced fund administration or fund servicing function, but is not mutually exclusive.
Confidence and Trust in Data
How do you gain Confidence and Trust in your Data?
The goal is to have independent verification of your investment data.
But how do you achieve independent verification, in practical terms… without teams of people to trawl incoming data records?
How do you know your valuations, fee accruals, and unit prices are in line? Especially when you have multiple sources and providers. You can only achieve this by aligning the data and verifying for yourself.
In our experience, we have found that a framework built on four pillars as described below, will provide a solid foundation for high quality data that you can trust:
Data + Process + Systems + Knowledge = Trust & Confidence
To increase trust and confidence, you should be able to:
determine the full path of the data, the lineage from source record through to analysis tool-sets, compliance rule-sets and outbound reports
see the process that captured your data and managed the data through to the end record
easily access knowledge of the data quality, informing you about the date and business rules that have been applied to validate and verify the data quality
manage this process on a scaleable platform, thereby minimising any manual processes that can deteriorate your confidence in the data quality
Working with your Custodian and Maintaining Independence
We see Custodians offering Securities Services as the Engine Room for core fund processing.
They provide specialised commoditised services. And what do we mean by that?
The diagram below illustrates a simplified version of the investment value chain. However, it highlights where most organisations focus on the competitive differentiation/advantage (large blue circles) and chose to outsource specialised commoditised services.
We see the functions as commoditised in nature as there are rules and regulations as to how these processes are performed, and they are indeed specialised as they require knowledge, skills, processes and systems in a non-standardised environment.
To illustrate the value in a commoditised service that require all of the above, here are a couple of examples where the services are invaluable:
Corporate Actions
There is a fairly wide range of options that listed corporations can take to restructure. It appeared that for a period Google and Apple were on a path to out-do each other with the sheer complexity of the corporate actions that they would construct. Add to that the interpretation of a complex action by data providers, the different manner in which different regions (yes you Japan) manage change to corporate events and you have a service that requires specialisation. It takes people with skill, knowledge, and experience of these market events to identify outliers and ensure correctness of an investment book valuation impact.
Fixed Income interest accruals
Last time I looked, there was over 150 interest accrual calculation methodologies available on Bloomberg to cover the breadth of global bond interest accrual requirements. They account for variances in day counts, holiday adjustments, market conventions, rounding and so forth. Knowing how to interpret all this information to ensure a correct daily valuation of fixed income assets is a specialised service. And again, it takes people with skill, knowledge, and experience of these idiosyncrasies to identify outliers and ensure correctness of an investment book valuation impact.
These are just two examples of the many non-standardised complexities that are faced in the fund services world. Depending on the reach of the investments of a fund, be it global or asset class, there are a number of specialised skill-sets involved in the production of fund services.
But… a commoditised service is by nature something that can (or should) be easily changed – in a somewhat plug and play manner.
Maximising your custodian partnership
On the other hand, at the front of the investment value chain (Competitive Advantage) are the long-term functions that make your business unique and that differentiates you from your competition. This is where you have specific needs which leads to the question:
How do you fit into a Standard Model that meets your specific needs?
You look for opportunity where you can gain non-competitive advantage, and where you can leverage scale.
This is where you can leave it to the experts and pay for a quality commoditised service.
Because their product is commoditised, it must be of a reliably high quality, that should only need verification. A key for any fund should be independent verification of investment data – NOT PROCESS REPLICATION.
If you don’t trust your outsource provider, why do you have them?
Think of it this way… if you decided to internalise the functions you currently outsource to your custodians, you wouldn’t have another department replicate those functions internally. The alternative is to have a team of senior people that validates and verifies the work of the juniors.
So why would you do it just because it is outsourced?
Some organisations are running shadow functions, which leads to additional costs but minimal real competitive advantage.
To achieve a similar result when outsourcing, you benefit greatly from focusing on the validation and verification functions.
To do this efficiently, you can use our framework mentioned above
Data + Process + Systems + Knowledge = Trust & Confidence
When your provider sends you data files on a daily basis – commonly received in Excel, flat files or bespoke formats - you can apply the framework to:
Validate the data
Verify the work done
Validate the results
Enrich with your own internal data
And you will have achieved… Confidence and Trust… not only in your provider, but also in your investment data.
Additionally, through automated processes using the right platform, you will have a great tool for logging of repetitive issues from your providers. This allows for a conversation with them to review controls in that given area to reduce any future issues.
In short, maintain a healthy balance between Trust and Verification between you and your service provider.
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improve their investment control functions
