Asset owners are increasingly looking to technology to more effectively manage complex multi-asset portfolios, enhance returns and better inform risk management decisions. Top1000funds.com looks at how technology is being used by asset owners including LACERA and REST, and the insights of BCI’s chief technology officer, Tony Payne.
Asset owners are increasingly looking to technology to more effectively manage multi-asset portfolios, enhance returns and better inform risk management decisions.
Technology allows investors to manage and draw insights from increasingly large pools of data about the companies and assets in their portfolios, gain insights into total portfolio risk exposures, and improve efficiency.
As “go anywhere” multi-asset portfolios are more common than traditional 60/40 stock and bond portfolios, technology is an enabler for investors to see through the asset classes and identify common or unintentionally overlapping risk exposures.
For the nearly C$200 billion British Columbia Management Corporation (BCI), leveraging digital technology is one of the four strategic pillars of its business plan for 2022-2024.
Tony Payne, BCI’s senior vice president, technology and innovation and chief technology officer, citing the business plan said the fund’s investment in technology has “strengthened our operational infrastructure and talent base to support more sophisticated investment strategies.”
The strategic focus is on using technology across all business functions from using new sources of data to identify and capture investment opportunities – such as in ESG – to applying technology to improve operational efficiency throughout the whole organisation.
“It is definitely an important piece of the capability puzzle,” Payne says.
As an example he says the tools and analytics have enabled BCI to apply a multidimensional analysis of ESG exposures across the whole portfolio.
He shared a “thank you” he recently received from Jennifer Coulson, senior managing director, ESG regarding a data automation project that collects company data and reviews it for quality. Coulson told Payne that the automation enabled her team to save an hour for each of the 53 companies it was collecting data on. Over a year, she estimated that would save roughly 86 workdays of her team’s time, making the team more efficient.
Jonathan Grabel, chief investment officer at the $75.6 billion Los Angeles County Employees Retirement Association, also cited the importance of tools as ESG considerations increasingly are among investors’ priorities, especially to evaluate and monitor portfolio sensitivity to the transition to a lower carbon energy world.
Grabel says LACERA “is now using its systems to calculate the carbon footprint for the portfolio over time, see threats and take a long-term view.”
In the next few years, we will be using advanced technology to generate alpha
For Andrew Lill, chief investment officer of Australia’s A$70 billion Rest superannuation fund ESG is a third lens to any investment decision.
“Technology has to be a way to cut through and determine when you have high and low sensitivity to energy transition,” Lill says.
Overall, the systems allow investors to think of the portfolio holistically, see what is happening and decide what to do about it, Lill says.
“The tools help take investment decisions out of a subjective environment that is largely based on the human experience of staff over the last two decades.”
As an example, for Australian investors accustomed to the Australian dollar being a risk-on currency and a strong tool to buffer portfolios in volatile markets, these systems help to determine if holding the currency will continue to have the same effect in a rising inflation world, Lill says.
He and others pointed to the added complexity of multi-asset portfolios and the need to ensure that institutions are not taking the same risks across public and private assets and are not taking any uncompensated risks as they continue to try to serve the plan’s 1.8 million members.
From asset allocator to investor
Grabel says that tech tools are helping his fund evolve from being an asset allocator to being an investor.
“With greater real-time access to the portfolio as a whole, asset owners can be better risk managers,” Grabel says. “In the past, asset managers’ portfolios were separate and distinct. Now we can see through on a total-portfolio basis are the exposures correct and is LACERA paying appropriate fees for those exposures?”
Robust and sophisticated risk systems are a defining factor of the Canadian Model and help set the Canadians apart and are now an increasing part of the infrastructure used by asset owners in other parts of the world. As an example, the State of Wisconsin Investment Board has been using technology to do better analytics for more complicated portfolios that are multi-asset and unconstrained.
CIO of Canada’s OPTrust James Davis has said that risk management is now as much a source of value creation as a control function and his focus is on building a portfolio that is as resilient as possible which means only allocating risk – a scarce resource – with purpose.
With greater real-time access to the portfolio as a whole, asset owners can be better risk managers
As asset owners look to the future and the uncertainty of the macro economic environment, efficiency is increasingly becoming a focus. And while declining to cite specific savings from the use of technology LACERA’s Grabel did say that the analytics help ensure the fund is getting exposures in the most efficient and liquid ways.
“Tech really does enable us to be much more intentional. In core plus fixed income, we saw that we were taking a lot of active risk for a strategy that was supposed to be risk mitigating. We moved to passive and more core,” Grabel says. When selecting managers and constructing benchmarks the tools have enabled LACERA to “construct relationships based on true alpha.”
The systems “facilitate discussions based on facts, rather than waiting until a month after (something happens) to learn about exposures from third-party managers, we have an early-warning system that allows us to be better about rebalancing,” Grabel says.
Over the last few years, LACERA has made significant investments in a comprehensive risk management platform that includes an appraisal management tool for the direct real estate investment portfolio and helped with the creation in March 2020 – as the staff went to working remotely – of a rolling 90-day cash flow report, adjusted daily, that incorporates information on all uses of cash from benefit payments to investment calls that enables the elimination of cash drag, by through a cash overlay program.
Additionally, the fund’s investment team is structured differently than it was five years ago, says Grabel. The fund now has a group called portfolio analytics that is providing the staff with internal information for risk management, portfolio analytics, strategic asset allocation and ESG and stewardship.
“It allows us better understanding of the sources of return,” says Grabel.
what is next
Funds have been using AI to gain insight into their portfolios with regard to mapping the SDGs. The consortium started by APG is the most notable – with the €600 billion European giant recently setting out the digitalisation of asset management at the core in its next five year strategic plan.
Other funds such as the UNJSPF are also conducting research on developing quantifiable SDG scores using artificial intelligence to leverage big data and systematically measure companies’ impact on the SDGs.
The C$23 billion Canadian fund OPTrust is embracing the power of AI to improve investment outcomes via two new strategies based around re-enforcement learning and uncertainty modelling.
Similarly BCI’s technology head, Payne, says the immediate priority for the fund is artificial intelligence and machine learning and process automation.
“With the vastness of data (available) having the ability to work through data in a meaningful way is crucial. It will augment what the investor or PM will be doing. In the next few years, we will be using advanced technology to generate alpha,” he says.