Does Investment Data Management Enable Better Investment Decisions?
If you work in Investment Management now is a good time to have the title ‘Data Management’ in your job title. Uplifting investment management capability ranks on the list of most organisations’ strategic objectives and there are numerous projects, big and small, underway to deliver new solutions.
The most common objective is to use investment data to uplift the overall quality of investment processes on the belief that access to ‘better’ data will lead to more informed investment decisions and enable the introduction of more sophisticated investment processes.
But is this correct? Does access to better investment data lead to better investment outcomes? Or, have we all succumbed to the hype and, in fact, the ability of data to drive better investment outcomes is marginal at best?
If we compare the track record of active vs passive managers on the assumption that improved investment data will allow active managers to outperform passive managers, the evidence to date is not conclusive.
The following chart shows that active managers often outperform passive managers in bear markets but this is more than offset under bull markets. Further, over time, there is no observable trend of active managers pulling ahead of passive managers through improved access to technology and data. In fact, the opposite is true. In the recent bull market, there has been an overall underperformance of active vs passive mangers.
“Though 2017 marked a clear near-term improvement in active managers’ success rates, in general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons” – Source Morningstar’s Active/Passive Barometer March 2018
Source: Morningstar Direct, Baron Capital
If investment data was driving better decisions, shouldn’t we have started to see active managers pulling ahead of passive managers through higher quality investment decisions?
Whilst the empirical evidence doesn’t (yet) show sustained outperformance by active managers, Shoreline believes directing strategic investment towards improved investment data management does have merit and that simply comparing active vs passive investment performance doesn’t tell the full story.
We have identified other areas where improvements are frequently found, for example:
Improvements to investment data management drives better investment risk management – Whilst skill might be the key ingredient for delivering sustained investment outperformance, effective investment risk management requires a thorough understanding of your investment portfolio and its exposure to investment risk factors such as market, liquidity, and counterparty risk.
This is where effective investment data management shines.
Understanding what is held within a portfolio is often a very difficult problem to solve, especially where exposure extends to private assets such as Private Equity, Real Estate and Infrastructure. An effective investment data management model can allow an organisation to both understand its underlying investment exposures and also the risk characteristics of these assets.
Improvements to investment data management releases valuable capacity within the investment team – Our analysis has shown that a disturbing proportion of time is often spent by the investment team to source, clean and arrange data required to input into an investment decision. In some cases, up to 30% of time is spent by the team on managing data.
This is not only a poor use of time for expensive and valuable resources but also often means inconsistent data sources and increased risk of operational errors. Delivering consistent, clean, reliable, and meaningful investment data to investment teams allows the team to focus on analysis and decision making.
Centralising the investment data management capability promotes consistent investment processes – Where investment data is generated in ‘silos’ there are likely to be variations in the quality, completeness and timeliness of data and this can lead to inconsistent decisions that may adversely impact an organisations overall investment process. Conversely, where this capability is centralised, investment decisions will be based on a consistent data set and assumptions such as adjustments to valuations and exposures can be appropriately managed. This does not mean that teams will base decisions on the same views of data (in many cases different Investment Book of Record (“IBOR”) views will be needed to meet specific needs of investment teams) but the processes and assumptions underpinning each data view can be centrally managed and aligned.
In summary, whilst we haven’t yet seen improved data management driving a sustained outperformance of active managers, this does not tell whole story.
Improved investment risk management, maximising the capacity of investment professionals and supporting consistent investment processes are real and tangible benefits that can be achieved. Coupled with the benefits delivered outside of investments (improved client experience, more efficient regulatory reporting etc.) Shoreline’s view is that the current focus on improving investment data management is well deserved.
Bruce Russell
Director