Super funds’ demand for data has increased exponentially amid the renewed focus on governance and transparency of the last five years. Not surprisingly, these requirements emerged as a strong theme in our recent study of the challenges facing the superannuation industry, Evolving Superannuation Funds for the Future.
Several interlinked factors are forcing funds to revamp their approach to data and seek out new solutions for managing and analysing data to support better decision making.
The Australian Prudential Regulatory Authority (APRA) and Australian Securities and Investments Commission (ASIC) are requiring more frequent and granular reporting than ever before. APRA’s prudential standards, particularly SPS 530, require very specific analysis and reporting. At the same time, ASIC is introducing portfolio holdings disclosure that will make funds and their investment managers provide much more detailed disclosure of underlying assets.
Managing risk and volatility
There is a great desire to remove as much volatility as possible from members’ investments, especially for those members in or near the retirement phase. Super funds are becoming increasingly vigilant when evaluating the risk within their portfolio, analysing factors such as valuation, exposure to particular institutions, sensitivities, stress testing, value at risk and liquidity risk measures across multi-asset class products.
Retirement adequacy for members
Funds are concerned about helping members have adequate funding in retirement. This means accumulating sufficient capital and then protecting that capital and generating maximum income from it. Data is at the core of these efforts. Funds need detailed investment data, but they also need to integrate it with member data. Some funds are looking at lifecycle-style funds, while others are adopting a member-level financial advice model. Both require effective data management to be successful.
Insourcing the investment function
One consequence of the regulatory changes has been increased pressure on the smaller funds, driving mergers and consolidation. With mergers comes scale. And with scale comes the opportunity to bring investment functions in house. But insourcing investment is not simple and funds must have adequate access to information and data to manage their investments and to report on them appropriately to their boards.
Expansion of alternatives
Investment trends are also changing data needs. Super funds are increasingly adopting unlisted alternative assets both to dampen volatility and to improve diversification. As funds adopt these new strategies, they find that reporting grows more complex and risk becomes harder to measure. Analysing private equity, for example, requires very different processes, while accessing any information from hedge fund managers can be a challenge.
Data management and the role of the custodian
Super funds find that there are two elements in effectively responding to the data challenge. They must collect and manage data from across an increasingly complex investment universe, and they also must analyse and interrogate this data to the required degree. Super funds have a number of options. Some are considering creating their own data warehouses, but such initiatives can be costly undertakings with significant execution risk. Aggregating data from a range of different portfolios, managers and asset classes is a massive challenge.
Increasingly, funds are turning to custodians for an effective solution. With a critical mass of data already at its fingertips, the custodian can fill the gaps through proprietary insights, links to market sources or advanced analytics to deliver a complete picture. And, as technology enables this data to move to a real-time platform, there is huge scope to support critical front-office decision making in areas such as risk management and compliance.
In addition, by using an external provider, funds can access expertise and solutions that have already being successfully deployed by other funds, rather than having to design and develop their own approach and continue to invest in those technologies for the long term.
Reflecting this trend, super funds’ investment teams are increasingly involved in choosing a custodian, as they consider the data capabilities of the custodian as critical in helping them deliver on their own governance needs.
Analysing the data
The tools needed to analyse the data are equally critical. Whereas a traditional report would provide a static analysis of a single snapshot in time, new dashboard-style tools allow funds to explore the data in a way that is dynamic and intuitive.
Analytics tools available to support investment decisions include:
- Performance and attribution to provide detailed analysis of portfolio composition, performance results and underlying exposures
- Scenario stress testing to help manage investment risk
- Trade cost analysis to help reduce trade costs and meet fiduciary and best execution obligations
- Pre-trade compliance systems to check for breaches ahead of execution
Emerging areas of functionality include exposure monitoring tools for measuring issuer and counterparty risk, with limit-setting and alerting capabilities that indicate overexposure to a particular legal entity.
Future of analytics
For many super funds, these increasing data and analytics needs will expand their custodian partnerships. Many will begin engaging with their custodians’ global research and analytics functions to help them solve unique and complex investment challenges. Funds will soon be able to see their investments in the context of the wider investment universe, and to blend their data analysis with world-leading investment research.
While data and analytics are among many changing dynamics within the superannuation industry, there are also opportunities in this area. With the right strategy, funds can take advantage of the wealth of information their data provides to meet regulatory requirements, manage risk and ultimately help members prepare for retirement.
Daniel Cheever is head of superannuation at State Street.