Asset Managers, How to address the Fund of Fund issue

In previous blogs I have looked at the issue of transparency and how the requirement for asset managers to provide granular security level portfolio has grown. Investors are asking for this data, and while insurers do so on the back of Solvency II requirements, but also institutional investors and pension funds are now seeking the same data for their risk management process.

This has created much discussion in the asset management industry about concerns over making data available in a timely manner and their intellectual property and investment strategy being put in the market within the required timeframes.

The question also arises about when is the right time to do this? What embargo period is right for various different strategies they use? Can active funds have the same embargo periods as passive funds? and so on. This debate will continue over the coming months, but one thing that is clear, is that asset managers have shortened their embargo periods and in many cases halved them.

Industry bodies have presented recommendations as to when they believe data is required in the Solvency II world. These range from detailed analysis of the work insurers have to carry out in respect to reporting and working back to when the asset data would be required in the process. The result of one study indicates asset data is needed on day 2 or 3 after month end. Other recommendations by associations have put forward working day 5 after month end. Insurers want the data on day 0, and asset managers only wanting to give it on day 10. The one thing that is clear is that it is sooner than currently being provided.

So, that’s from the perspective of an asset manager delivering data to an investor. But let’s look at where asset managers have fund of fund structures and are dependent on each other to complete look-through.

I have run a study of 10 asset managers and selected random fund of fund structures they have. The vast majority have inter-dependency and require data from each other. But the issue lies in the fact that they will not transfer that data to each other. Many have tried this by requesting data from their peers, but received the obvious response.

We are now seeing asset managers who wish to resolve this without putting their peer’s intellectual property and investment strategy at risk; in the same way they don’t wish their own to be put at risk either.

This is where a utility type infrastructure shows its real value. By allowing asset managers request their peers to place data in a utility that allows investors access to the data – whilst not allowing competing asset managers view it, solves the problem. The asset manager who has a Fund Of Fund structure only wants to know that each of the underlying funds have provided their data and does not want to actually see the data itself.

So, we now enter a new phase where asset managers ask each other to provide data to a secure utility infrastructure, where investors can access it, whilst they protect their intellectual property and assets under management. This, I believe, is the only way to protect assets in fund of fund structures and without it there will be significant outflows in the coming years.