Asia’s plate-spinning SWFs slowly capitalising on benefits of technology
Category: Asia, Global
By Toby Garrod
Global investment views complicating management and maintenance
Current changes in technology demands among Asia sovereign wealth funds (SWF) are not so much about moving up the evolutionary ladder as they are about stepping off the terra firma. After years of relying on in-house fund managers to run risk management, performance, regulatory and transparency systems on Excel spreadsheets, many of these expansive funds have reached the limits of their capacities.
The funds’ newfound establishment as sources of national income has meant that their assets under management (AUM) have grown significantly along with the sophistication with which they invest. This has brought about significant investment outflows to foreign fund managers operating external systems. Such loss of control in regard to data is unacceptable in the newly tightened global regulatory environment. SWFs are extremely concerned about meeting regulations. Cue the technology providers.
“The market is developing significantly,” says Fran Thompson, regional head of business development, Asia at DST Global Solutions. “They are increasingly looking for technology solutions to support their business growth. It’s not that they are moving from in-house toward specialist firms, rather they are relying less on their asset managers as a single data source to carry out their portfolio risk management and provide investment information.”
The growing prominence of SWFs has forced a range of issues within the segment. Questions have been raised about the wisdom of retaining a home bias in investment decisions, taking into account investment returns locally versus abroad. International investing brings auditing and compliance problems that need addressing for every foreign jurisdictions. Then there is risk. Concerns over control of assets and data have also been raised. The result, in regard to technology, is a complete overhaul in the way SWFs manage their data.
“Technology in [the] risk management and portfolio management [of SWF’s] has certainly been developed with better control and audit logging for transparency,” says Didier Giesen, sales director buy-side for Southeast Asia, Misys. “For instance, Singapore has for the first time given a layout of Temasek’s portfolio investments returns. With these changes, the major difference between SWF and natural asset management technology is probably the advanced innovation and capacity to meet the needs of highly sophisticated investment strategies. Technology is unlikely to improve SWF’s long investment returns against either high volume or short-term investments via active asset management, but technology for SWFs can improve transparency and control. Another difference is probably the frequency of reporting back to the state. The minister of finance may not need to have a daily report of investments done by a SWF. Technology can certainly support real time info, but it is a question of requirements.”
Although the needs of these funds are clear, meeting them requires an awful lot of time and energy. SWFs take a long-term view on their investments as they are very long-term by nature. Furthermore, when it comes to making business decisions around technology they tend to be rather cautious due to the number of departments that need to be acknowledged before business decisions can be made, given the quasi-governmental structure of these institutions. The ever-present need for consensus building within north Asia’s governmental institutions is proving pivotal.
“Working with a sovereign wealth funds can be a far longer process than working with an investment management firm or an investment bank where they want to make a decision and roll it out in six months,” says Ms. Thompson. “First of all, there is no short-term solution with a SWF. It’s a very slow and careful relationship that one has to build. They require high levels of customisation, so it’s a very consultative and complex solution and process. They typically require flexible data models to accommodate investment data specific to multiple asset classes, and they need to be able to expand those as and when needed. Likewise their calculation capabilities must be flexible. Based on the conversations I’ve had recently with SWFs, data visualisation and analysis are extremely important to them as well for their business intelligence and decision making. They have the same requirements as traditional fund managers, and then they have additional unique requirements.”
Drilling down on the specifics, Mark Wightman, global head of alternatives strategy at SunGard, describes the kinds of trends he is seeing in terms of services required.
According to him: “In terms of technology, we have seen investment across the board, from decision support, order management, portfolio and risk management, compliance, reconciliation and accounting, and we see this trend continuing as the SWFs grow their assets and require the tools to properly manage and account for their investments. Like any traditional asset manager, SWFs want superior operational efficiencies and straight-through processing (STP), increased transparency and a platform for growth as assets and asset classes increase.”
“There’s certainly a growing need for future portfolio return capabilities,” notes Mr. Giesen. “SWFs will always face a balancing act between asset liabilities management versus return on investment (ROI). Analytic technology is helping SWFs to balance between the two.
“Another aspect is end-client engagement via social networks and web portals. We are seeing considerable efforts from SWFs to keep the public informed about their performance and each member’s choice of investment into their pension fund and medical care, which ultimately will rely on the size of the country’s SWF. The defence of the currency and protection of reserves become secondary with the deficit of pensions in most countries.”
But while the technology firms each have their own ideas about the best ways in which SWFs can be served, it’s crucial to understand that the funds may well not see things their way. For instance, the firms tend to assert that solutions are three-fold, spanning risk management, transparency and regulatory requirements. The funds meanwhile are extremely focussed on regulation, and apparently far less concerned with the other two issues.
“If you ask them to list the three main issues in order of importance then you ask us, the replies are likely to be quite different,” says Ms. Thompson. “You’re average SWF is focused on performance, regulation and compliance because they are quasi-government bodies. And the cost of regulation today is far greater than in the past because of the rate of change and tightening requirements. It is necessary to focus on this but we also focus on business needs and things like data management, business intelligence and reporting tools, to help them understand performance results and improve the overall value in their portfolios. But this is a longer-term strategic business decision. The big challenge when dealing with SWFs is to reach those who are driving the business strategy, who are ultimately trying to increase their AUM and returns, in addition to the technology department who may have a more specific focus.”
These conservative attitudes among many of Asia’s SWFs are holding them back from serving their missions in the best way possible, say technology providers, who contrast them against the very large US funds, such as CalPERS or the Ontario Teachers’ Pension Plan, which are extremely creative in the ways they invest and with the sort of risk appetite they have, as well as in the ways in which they deploy technology.
“One of the major funds in China has been trying to make a decision on a technology solution for some time,” says Ms. Thompson. “That said; they are slowly catching up everywhere. In China these funds have budgets for technology, but building consensus takes a long time.”
At the cutting edge of these technology demands is the emergent demand for cloud technology services.
“The changes in cloud computing have allowed for increased transparency among clients, such as SWFs, as people can access the information from wherever they are. However, it all depends of the strategy of the fund,” says Laurent Laclaverie, CEO, Asia Pacific at StatPro. “Funds tend to either have a mission to invest for future financial returns or a mission to support specific industries. Depending on this objective, cloud computing may add more or less value. The former would seek to promote transparency, while the latter would likely need less, to a certain point. Cloud computing is still in an early age and rightly or wrongly, this makes people suspicious about security and confidentiality issues. It will still take some time before SWFs officially move from internally installed and operated platforms to cloud-based platforms, but the increasing demand for transparency should make them consider the cloud as an option.” Again, conservatism, rightly or wrongly, is holding back development.
“On a pure infrastructure technology basis, SWFs need to have their assets better protected than anyone else, especially on a disaster recovery point of view,” says Mr. Giesen. “Asia can suffer from serious natural disasters and it would make sense to use a cloud base servicing for the portfolio management system.”
“We have tried to inform some of these funds on the benefits involved,” he says. “Even though they were very interested in our functionality and our creativity, they are still not considering externalising the storage of their data yet. Some still operate in silos and employ large numbers of people, but this data, which is one of their key assets, needs to be stored in specific ways, and must at all times remain within the country, some regulators say. Our platform is technically able to deal with that. But the main concern is about the security of the data, and there’s nothing we can do about that apart from constantly improve the technology and inform and educate the funds about the benefits of cloud computing. Indeed, right now we believe our platform is more secure than some of the e-banking platforms that most banks provide their clients. Meanwhile, some of these funds are paying tens of millions of dollars to maintain these servers, just to store data. Perhaps this cost alone will force them to consider moving to cloud computing.”
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