We have witnessed an amazing disruption to our society, our economy and the financial markets over the past month. It’s sad to watch the number of new jobless claims get worse each week.
This crisis has not been easy to navigate, and we are not out of turbulent waters yet. Fixed income portfolio mangers have seen triple-A rated asset-backed securities sold at +1,000 bps over swaps and up to 1 point bid-ask spreads on U.S. Treasury bonds in just the last couple of weeks.
Of course, the main problem with left-tail events, is they don’t usually telegraph themselves. It’s that whole “unknown unknowns” concept. I’ve always tended to view life and markets as a puzzle to be solved, and yet the solution is always changing. That’s why endeavoring to create and improve upon efficient processes is so important — if you are not always improving, you’ll get lost in the puzzle.
Times like these are when institutional investors need the right tools to provide transparency based on a foundation of accurate, validated investment data. Large asset owners are catching on and cloud-based systems are on the rise.
When you’re ready to make the move to a better solution, there are three essential criteria in the selection process to keep in mind: data management, accounting, and reporting.
Consolidated Solution, Consistent Data
For most public pensions, the custodian is also the accounting book-of-record (ABOR) and there are several investment books-of-record (IBOR). Often, there is also a separate provider for performance calculations. Each of these systems or service providers tend to calculate metrics and balances differently and must be reconciled. These recons are typically somewhat repetitive in normal times and we become “comfortably numb” to them until a time sensitive crisis.
When the S&P 500 experienced an almost 10% point drop on March 12, and the MSCI World Index had its worst day on record and high yield and investment grade CDX spreads spiked, how long did it take CIOs, oversight boards, and executives to see correct (not guess-estimated) exposures across all portfolios, including public fixed income and equity and private investments such as LPs and real estate? How about now with portfolio managers, accounting teams, and consultants rotating or permanently out of the office? Did it take one day, two days, three days, a week?
With a solution in place that aggregates, reconciles, and validates your portfolio data on a daily basis, this information becomes readily available. This allows portfolio managers to quickly find the answers they are looking for in one location, and trust that data is accurate.
Typically, one of the first risks to assess in a risk-off or highly volatile environment is liquidity coupled with an assessment of the impact of changes in market values across and within all portfolios. It is invaluable to be able to quickly assess liquidity and market value impacts from a wholistic perspective. Are there available funds for near-term expected cash outflows (e.g., pension flows; LP commitments) and will changes in market value induce any re-allocation transactions? Re-allocation decisions and processes are often set up to happen systematically in theory but in actuality, require some form of communication and agreement among the heads of the various asset classes. If each asset class director is using the same set of numbers, the communication and decisions process improves tremendously.
This is just one of the ways Clearwater adds value during times like these. Clearwater specializes in bridging analytical systems and service providers to give asset managers accurate consistent data improving their investment decision-making process. The Clearwater system can draw metrics from each of the various providers (e.g., IBOR(s), LPs, consultants, custodians) to create a single set of reconciled numbers.
The public pension manager’s disclosures of record are mostly drawn from its GAAP and GASB accounting numbers. Utilization of the Clearwater system works best when it functions as the ABOR. It’s a single point where PMs, accountants, auditors, and public disclosures can source for consistent reliable and verified data. And, Clearwater allows your other service providers (e.g., IBOR, custodians, consultants) to specialize in what they do best.
It is true that the current environment has been stressful but on a personal note, I believe there have been some tremendous blessings in the midst of all this. It’s been gradually more difficult to interact with my teenagers in the past couple of years because of their crazy busy schedules and their desire to be more in control of their own lives - but last night my family played probably the longest game of UNO in history – and it was absolutely wonderful spending that time with my children. My hope is that you are blessed with some memorably good times amid this bad series of events.