AQMetrics’ asset management clients have experienced mixed fortunes so far in 2020. Some firms have seen their portfolios tumble, as financial markets experienced unprecedented volatility brought about by the global pandemic. Others, meanwhile, have managed to weather the turmoil, and some have even capitalised on it. And while redemptions had reached record levels in March, at the height of the crisis, investor nerves have finally calmed as markets have bounced back strongly.
Yet looking forward, the recent sell-off underlines an enduring fact: only the most agile firms will survive and thrive going forward, with risk management now more important than ever to end investors.
At AQMetrics, we talk regularly with our fund management clients in order to understand the evolving needs of our customers’ customers. More than anything, investors want to know that their hard earned funds are going to reputable firms. Firms that will survive and thrive through global crises, and firms that will put their needs at the core of everything they do. So how do you ensure that your firm maintains its stellar rating and stays at the top of investors preferred fund manager lists?
There are key areas in which your firm must display leading edge competencies.
It’s no longer sufficient to say you have good internal audit, risk and compliance processes. We know from conversations with end investors that they want investment firms to be able to show they are top of their game, not only in terms of investment decision making and returns, but also in the fields of internal audit, risk and compliance. So, what can you do?
The internal audit, risk (market, liquidity and operational) and compliance areas of your firm must have strong controls and report more effectively than ever to the firm’s executive committee. This is more than just a box ticking exercise.
Ask yourself some key questions:
- Does your firm have a solid set of policies and procedures, with daily position monitoring and weekly reports discussed in the committees, including stress tests?
- Can you show that your firm has not experienced any relevant breaches? Can you be sure?
- Is your compliance team consistently monitoring the implementation of all policies and exposures of the funds?
- And can your firm show that operational risk control is robust, with low operational losses?
Ask yourself these questions seriously and honestly, as this is the detail that end investors are looking for.
Investors also want to know if the risk-adjusted performance of your funds has been consistent with that of relevant benchmarks over the last 36 months.
Can you quickly show if most of your strategies range between the first to the fourth quintile in comparison with benchmarks in the analyzed period? If you cannot, ask yourself how quickly your competitors can provide this information to prospective investors? Are you falling behind due to a lack of readily available information in a robust system?
Other questions may include:
- Can you quickly show AUM movements, with no pre-preparation of data and reports?
- Can you show the volatility impacts on your fund in a matter of seconds at any time?
- Can you instantaneously show how growth is attributed across asset classes?
Even if your answer is yes, be sure the information is visually appealing, clear, succinct and easily understandable as soon as it is generated, as end investors expect nothing less. Investors no longer want to fund labour intensive and error-prone manual report preparations. They want more bang for their buck, and as a result many see end-to-end automation of risk management as the gold standard they now expect from fund management firms.
Risk Management By Design
Does your firm have a strategy of risk management by design? Today, end investors expect nothing less. If your answer is no, all is not lost. There are many things firms can do today to bring risk management by design into their emerging strategy. This crisis has caused firms to revisit both their long and short-term strategies and now is the time to take the opportunity to include risk management by design into your core strategy.
As investors are asking the pertinent questions around how risk management is executed in investment firms, automated tools for risk management are in high demand and savvy investors are asking questions about these tools.
Are they interactive, real time, easy to use and understand? Can they be shared with the investors? Is risk management core to the tools design or an ancillary after thought? Are the tools regulatory compliant? How do the tools you use address stress testing?
This crisis has truly heightened investors’ awareness of the need for robust and frequent stress testing, as they appreciate more than ever that inadequate or failed controls may result in even further liquidity risk in an already volatile time with regards to liquidity.
And investors now want to know that investment firms are using adequate technology tools with a central data source for measuring, monitoring and reporting on market and liquidity risk.
If your firm can provide timely and consistent reporting to end investors from tools that you can confidently say are robust and future proofed to deal with emerging regulatory change, then you will undoubtedly be ahead of your competition as investors seek assurance that they are placing their funds with the best in class fund manager.
Take the bold step
If not already done, now is the time to take the bold step to transform and standardise your risk management function through advanced technology. New risk management technology platforms provide the firms with the functionality, flexibility and visibility to retain and attract their end investors well into the future.