Funds Europe talks to Milestone Group about the increased importance of asset allocation and the need for a total portfolio view.
There has been an increased focus on the role of the asset allocator thanks to three converging market trends, says Randal McGathey, vice president Asset Allocation Solutions at Milestone Group. The first of these is the growth of target date funds where a professional asset allocation strategy is embedded within that fund.
The second is the emergence of delegated investment solution providers, otherwise known as outsourced chief investment officers, that take on the fiduciary responsibility of developing and implementing an asset allocation strategy on behalf of their clients.
Thirdly, there is also a growing tendency among the largest institutional investors and pension funds to insource asset allocation as they bring the management of their portfolios back in-house. This latter trend in particular has highlighted the importance of asset allocation but also the complexity involved, especially when portfolios are becoming ever larger and with a more diverse range of underlying assets.
“What goes across all of these trends is the importance of asset allocation,” says McGathey.
This is why Milestone has developed its pControl Asset Allocation solutions targeted at institutional investors from pension funds to endowments, and fund companies to investment managers and supporting both discretionary and algorithmic portfolio management.
The starting point of the solution is what McGathey calls the ‘total portfolio view’. “If you take a typical diversified portfolio, it will have pooled products, separately managed accounts, private market funds and proprietary hedge funds or real estate assets. The data for all of these accounts may be distributed across several different platforms all using different technology.”
Increased regulatory scrutiny and investors’ demands for more transparency has made fund data infinitely more valuable. It is also critical for asset allocation, says McGathey. “Up to now many institutional investors and managers have been using spreadsheets to knit all of this data together.”
And while this may have worked, it is not as efficient or agile as it needs to be. For example, it is nigh impossible for firms relying on spreadsheets to revalue their total portfolio daily or provide a timely, accurate and consistent view of a portfolio that investors demand.
“It is also an operational risk mitigation tool because spreadsheets are so manually intensive and attract key person risks that CIOs increasingly consider as unacceptable,” says McGathey.
Furthermore, the low interest rate environment and the hunt for yield beyond traditional asset classes has seen pension funds shift their allocations into more alternative asset classes, private equity, hedge funds and derivatives, all of which has created more complexity and a greater need for more technology.
The principal aim of Milestone’s solution is to enable the designated asset allocator to monitor and manage their portfolio as a single investment structure irrespective of its implementation, says McGathey. And while the starting point is the Total Portfolio View, the solution extends through the middle office and order management functions to support the end-to-end asset allocation and investment process across both account-based fund-of-funds as well as cross-invested interfunds.
The transaction capabilities cover private equity, real estate, hedge funds and other illiquid investment types as well as pooled funds, and the initiation of cash directives to separately managed accounts.
“As well as providing the ability to manage and monitor the asset allocation, we also offer the ability to tweak the portfolio, model scenario changes and send orders to the market,” says McGathey.
One of the biggest challenges for Milestone when it comes to promoting its asset allocation product is convincing pension funds and investment managers that the total portfolio view is a realistic concept and that its Asset Allocation solution can deliver it.
“We are finding that a number of clients are surprised to find a platform like this because they don’t think it exists,” says McGathey. “The asset owners and allocators all see the importance of the ‘total portfolio view’ but they see it as a data management project first and foremost. So we introduce them to the idea and then we look at the more granular details and where their expectations meet the solution’s capabilities. Importantly, it’s not just about data, it’s actually about unifying both data and processes across stakeholders – portfolio managers, compliance, investment implementation and operations as well.”
Milestone’s intent is to make clear to clients that attaining a total portfolio view need not be a bespoke, multi-year data management project, says McGathey. “For years they have had various different systems based on asset classes and have had to try and knit these all together with various data management and analytics tools. But now there are platforms out there, such as ours, that eliminate the need for them to build something in-house or from the ground up.”
In a technical sense, the first task for such a system is to assemble all the data from various sources and to ensure this is done in a business-appropriate way. And while some of the larger institutional investors are able to do this, the greater the number of asset classes, investment managers, investment types and service providers, the greater the challenge in doing so, as well in providing the information to the many stakeholders in the investment process.
Milestone’s Asset Allocation solutions are based on its pControl platform. “The fundamental design allows us to automate critical operational processes that deliver data integrity – providing classification structures and the ability to view the portfolio through different classification structures in the same systems as the portfolio is monitored and traded,” says McGathey.
“pControl understands those complex investment structures, how they behave and interact and the importance of the data connected to those structures. It is about having a view of a single investment structure.”
The solution will also work with other tools that clients may rely on. “All of the data within our platform can be migrated or exported to other tools. The analytics market will continue to evolve in important ways and pControl will continue to support the use of these tools and provide connectivity to our own platform.”
As the trend towards investment insourcing increases among institutional investors and they need to explore more sophisticated strategies in search of greater returns, more of those investors will look for a platform such as pControl and its asset allocation solution, says McGathey.
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