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Investor demands evolve with the mainstreaming of alternatives, says Northern Trust

A new survey of global asset managers and institutional investors, sponsored by Northern Trust, would suggest that alternatives have become mainstream. With this, asset managers are facing demands from investors for an increased level of transparency that more closely aligns with that provided for traditional long-only funds.

The survey was conducted in partnership with The Economist Intelligence Unit (EIU). The aim, says Stuart Lawson, Senior Vice President and Product Manager, Northern Trust, was to ascertain any shift in focus among global asset managers and asset allocators, from a post-financial crisis perspective.

“The EIU surveyed more than 200 executives across a range of different groups. Half of the sample were groups with more than USD5 billion of assets under management.1 We also tried to make sure we had a fairly even spread across the globe: US, EMEA and APAC, to see if there were any trends that emerged. 

“The survey primarily focused on transparency and risk management. We wanted to understand if the needle had moved post-financial crisis with respect to those two areas, and if it had, if there were any insights we could draw in terms of how these groups were addressing those two considerations. Ultimately, we wanted to understand the difference in how the industry views traditional vs. alternative asset classes,” explains Lawson.

Transparency has long dominated institutional investors’ approach to selecting alternative funds, and the survey results suggested that managers are likewise paying greater attention to this as a matter of priority. According to Lawson, more than 60 per cent of respondents – both traditional and alternative – ranked transparency as the most important factor.2 Transparency, says Lawson, is becoming “a key area” in terms of the way the global funds industry operates.

“A lot of the focus of the survey is on what transparency means and why it has become so important,” explains Lawson. “What we and industry stakeholders are keen to understand, ultimately, is, what is the best way to ensure that an investment is doing what it says it should be doing. Whether you are an investor, a regulator or a manager, you want access to data that gives you that clarity.”

The upshot is that people want to be sure that the fund product they allocate to – or are thinking of allocating to – is in good standing and ticks all the necessary boxes, regardless of whether it’s a vanilla long-only equity fund or a private equity fund. If the product says that there are certain investment restrictions that it needs to comply with, there needs to be a demonstrable way to show that is the case. “If there are details in the fund prospectus on fees and how they are calculated, there needs to be transparency around that so that investors feel they are getting value for money,” adds Lawson.
 
Pre-investment & post-investment considerations

Part of the Northern Trust/EIU survey sought to examine the main concerns that asset allocators and managers have prior to making an investment.   

With respect to the issue of risk management and transparency, the survey showed that both traditional and alternative managers have a similar focus at the pre-investment stage. 

However, with respect to post-investment considerations, “what was interesting was that alternative managers moved to a different degree than traditional managers”, states Lawson. 

For traditional assets, there was a significant increase in transparency requirements, with risk and other points becoming less significant post-investment. Pre-crisis, the degree of transparency for traditional asset classes was 9 per cent, whereas post-crisis, the figure had risen to 21 per cent.2 

Sharp rise in post-trade transparency 

In terms of post-investment considerations for alternative asset classes, the survey found that risk management was already a significant factor pre-crisis – 21 per cent – and moved up to 25 per cent post-crisis. However, with respect to the degree of transparency, it moved from 3 per cent to 17 per cent.3 

“That was one of the most significant findings. Alternative assets, post-crisis, have seen a clear shift in demand for increased transparency, after the allocation has been made. As alternative assets have tended to be more opaque, there has been a real drive by the industry to open the lid to give investors and regulators a clearer picture of what is going on in alternative fund portfolios: how are fees being charged, and how is the performance and risk of the assets being assessed? 

“That is an interesting theme for us because as a service provider, alternatives have become mainstream. There is now a serious demand within the industry to treat them in the same way as traditional assets and provide the same degree of transparency,” comments Lawson.

Standard transparency model

If alternatives have indeed moved into the mainstream that presents a real challenge to fund managers, given the sheer diversity and complexity of alternative assets. Comparing a portfolio of real estate assets to a portfolio of private equity assets is far from easy. 

“They have incredibly diverse characteristics so the industry needs to try and find a way to demystify these asset classes and make them more transparent to investors,” say Lawson, who continues:

“There are two themes that have come out of the survey. First, there is a lack of consistent standards in the alternatives industry and second, there is often a consistent lack of ownership within organisations. Whereas regulatory compliance such as the regulatory reporting required under the Alternative Investment Funds Directive usually has a clear ownership within an organisation, transparency doesn’t. More often than not it sits with an investment committee but it may also sit with various individuals within the firm, depending on how it is structured. 

“Those two aspects remain fragmented at present. I think what we’re seeing is a general move towards standardising the process – i.e. the ownership – so that there is a clearer way of delivering the transparency that the market is demanding.”

Data management

To achieve this standardization requires smarter data management. There is a move within the industry to consolidate data into a single warehouse, or service provider who can provide alternative managers and their end investors with data across all alternative assets, in a consistent way. 

“One of the main surprises of the survey was that ownership of transparency within organisations is more fragmented than we initially thought. We also see some fairly marked differences within different regions. For instance, the way that firms acquire information about alternative investments is very different. 

“Asia Pacific has quite a different way of gathering the data for the purpose of transparency. There is a lot more reliance on regulatory filings – 58 per cent cited that as their main source. By comparison, in the US, the figure was only 23 per cent,”4 confirms Lawson. This may be driven by differences in regulatory regime and the availability of regulatory data in the public domain.

Standardising transparency, in terms of policies and procedures and how data is managed, looks set to become an important trend. Doubtless, there will be a role for industry bodies to support that process. 

“Internally, the survey would suggest that organisations, particularly fund managers, have perhaps not kept pace with what the market is now demanding, in terms of their internal ownership. There is a disconnect and this is something firms may need to think about when delivering on transparency,” concludes Lawson.
Readers can also download this infographic that summarises the results.

Footnotes: 1, 2, 3 and 4: Data has been sourced from the Economist Intelligence Unit survey, February 2017. 
 


About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has offices in the United States in 19 states and Washington, D.C., and 22 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of March 31, 2017, Northern Trust had assets under custody of US$7.1 trillion, and assets under management of US$1 trillion. For more than 125 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit northerntrust.com or follow us on Twitter @NorthernTrust.
 
Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at https://www.northerntrust.com/disclosures.

 

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