Data-Driven Decisions: What Asset Allocators Need to Know

There’s a quote, often wrongly attributed to Mark Twain, that is highly relevant to the data that investment teams rely on to make portfolio decisions: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Except that in the case of multi-asset class investing, the real problem is “what you need to know but can’t access.”

If you’re an asset allocator managing a multi-asset class portfolio, you face the challenge of managing allocations to hedge funds, private equity, real assets, fixed income, direct securities and other assets. To make informed decisions across such a diverse portfolio, you must collect, aggregate and analyze vast amounts of data. Unfortunately, in many cases that data is “trapped” in multiple systems, spreadsheets and databases. Furthermore, the data is not presented in a consistent manner. Simply stated, the data is out there somewhere – it’s just not in a form that is readily accessible to investment decision-makers.

Consider the following examples showing how different types of limited partners could benefit from a consolidated view of investment data to make smarter investment decisions across a wide range of considerations – including risk, concentration, liquidity and funding levels.

Risk. Let’s say you are the CIO of a family office, and you would like a clearer idea of how different investments fit within stated risk tolerances. You need a way to monitor exposures across your entire portfolio and also model how those exposures might change based on different economic and market scenarios, such as a rise in interest rates or an inflection point in the credit cycle. And, if you are evaluating potential new managers, you would want to be able to look at the risk maps on thousands of fund managers – allowing you to more quickly assess potential investments and understand how it aligns with the risk exposure in your current portfolio.

Liquidity and Cash Management. At a non-profit endowment, it is essential for you to know whether cash flows from investment returns will be sufficient to achieve strategic goals – for example, funding scholarships, providing grants or launching new programs.  Your investment office would benefit from advanced modeling tools that can be used to project cash flows from either the entire portfolio or individual investments (including complex private equity holdings). It also would be helpful to be able to project cash flows from prospective investments and account for uneven funding needs and liabilities over time.

Allocation to Alternatives. Now, consider the needs of a public employee pension plan that is planning to increase its allocation to alternative investments to achieve its target rate of return. In this scenario, you would need access to data that would enable you to gradually transition the portfolio to achieve the desired target allocation, while allowing pension staff to track progress after each alternative mandate. With an average funded level of 72.6% last year, you would be one of many public pension plans that are considering increased alternatives allocations for years to come.  During this process, it’s vitally important for you to continually collect and analyze data and identify gaps in allocation, helping provide critical information that allows you to make the most informed investment decisions as assets shift between asset classes.

De-risking Pension Plans. Finally, let’s say you are at a corporate pension plan, one of the many that have adopted a liability-driven investing (LDI) approach to managing portfolios. You’ve been fortunate enough to incrementally increase your funded ratio since the 2008 financial crisis, but you’re still falling short of a fully funded pension plan, similar to your peers that are currently averaging a funded ratio of 87.1%. Pursuing your LDI strategy, you will look to strategically increase your fixed income allocation after seeing gains in your funded status, but you will still rely on alternatives and equity allocations to meet your return assumptions. As part of this process, it’s important to not only have a set asset allocation glide path, but also for you to, once again, have a transparent and ongoing view into allocations across asset classes so that your portfolio is de-risked at the right pace.

In addition to the above, there are many other scenarios where institutional investors can benefit from a holistic view of their multi-asset class portfolios. Having investment data that’s reliable, consistent and accessible across asset classes, supported by the right analytics tools, makes all the difference.

The bottom line is: to manage an institutional portfolio, investors must be able to analyze performance, assess risk, track asset allocation decisions and leverage the right set of data to make informed investment decisions. We are seeing a range of institutional investors, from family offices to endowments to public pensions to corporate pension plans, that are searching for enhanced portfolio management and reporting capabilities that bring together a vast array of data from multiple systems and create a “single view of truth.”

To find out more about how comprehensive data aggregation and analysis can inform your asset allocation decisions, explore the Solovis platform. We understand the challenges facing pensionsfamily offices and endowments and foundations and have helped organizations like yours transform the way they make investment decisions.

If you’re ready to shake up the status quo and improve efficiency and accuracy in your quarterly reporting, check out our Get Lean in 2019 program. It’s packed full of resources to help your overburdened team focus on bigger and better things.