Money managers and some pension funds are licensing powerful new portfolio accounting systems to better control investment risks.
The $127 billion California Public Employees' Retirement System, Sacramento, is the latest pension fund to use such a system to track its investment activity around the world.
For pension funds, the licensing of such software is, so far, uncommon.
Fewer than 5% of pension funds license portfolio accounting software, estimates Bill Stone, chief executive officer for SS&C Technologies Inc., Bloomfield, Conn. SS&C licenses portfolio accounting systems.
Mr. Stone, however, expects the percentage to increase to more than 75% among larger pension funds. The reasons: greater internal controls for compliance with fund policies and for risk control.
Pension funds that run money in-house need accounting systems to get timely information, said Stephen Nesbitt, a senior vice president with the pension consulting firm Wilshire Associates, Santa Monica, Calif.
Mr. Nesbitt said CalPERS does have an internal accounting system, but it is ineffective for its needs.
Pension funds that don't invest money in-house rely on the accounting systems of their custodian and their managers.
Robert Aguallo, deputy chief executive officer of CalPERS, and Jerry Albright, investment accounting supervisor for the $61 billion Teachers' Retirement System of Texas, Austin, both are proponents of accounting systems.
The Texas Teachers' fund had licensed portfolio accounting software earlier.
Other institutions that have the accounting systems in place include the $8 billion Teachers' Retirement System of Louisiana, Baton Rouge, and the Pension Benefit Guaranty Corp., Washington, with assets of $12 billion.
The same type of software is used by Teachers Insurance & Annuity Association-College Retirement Equities Fund, New York, which has $190 billion in assets.
In discussing why pension funds need portfolio accounting software, Mr. Stone said, "Remember the pension fund's assets are the pension fund's. They're not the custodian's and they're not the asset managers'. The fiduciary responsibility is with the pension fund.
"The reconciliation process and all of that minutiae that has been outsourced has now proven to be problematic in things like Orange County (bankruptcy) or Barings (losses) and others," he said.
He said pension funds also are coming under increased pressure to produce good returns and to produce them under reasonable risk levels.
Portfolio accounting systems provide data on portfolio holdings, asset allocation, realized and unrealized gains and losses and actual and projected income.
By acquiring portfolio accounting software, pension funds can themselves monitor their investment activity and cross-check information against other accounting programs.
CalPERS officials hope their new accounting system, which will be installed in two phases and completed by the end of 1998, will help identify problems early on and resolve errors.
CalPERS wanted the software, in part, to catch potential errors. The potential for errors has increased as CalPERS has expanded its investment allocation to include emerging markets and a wider range of alternative assets, said Mr. Aguallo.
CalPERS using PAM
CalPERS licensed PAM portfolio accounting software from Princeton Financial Systems, Princeton, N.J.
(However, SS&C, a finalist in a CalPERS search for accounting software, earlier filed a protest against CalPERS' selection of PAM, noting it is sold by a subsidiary of State Street Bank & Trust Co., Boston, CalPERS' custodian. CalPERS denied the protest, saying Princeton Financial disclosed its relationship to State Street. But SS&C officials have some concerns and are evaluating the situation, said Lorrain DiBacco, director of communications.)
CalPERS intends to track all of its securities holdings around the globe on the system for investment accounting and reconciliation.
Like many other pension systems, CalPERS already gets portfolio accounting information from its custodian, State Street Bank. PAM will be the fund's back-up system.
Because of the size of CalPERS' holdings, the fund's finance committee recommended CalPERS be able to reconcile investment transactions independently, said Mr. Aguallo.
One potential area of stress is international currencies. Changes in the value of currency, which can affect an investment report, might not be picked up immediately, said Mr. Aguallo. A money manager can send in an investment report that conflicts with information from a custodian.
CalPERS wants to be able to resolve the conflict independently, he said.
The $61 billion Texas Teachers' fund also uses PAM.
"We pretty much use it as a third-party confirmation on what our custodian is paying us on, our securities income, as well as verifying the transactions that closed or transactions being entered into," said Mr. Albright, the supervisor for investment accounting.
He added the fund uses it to "track management. We can tell from its report writing feature how performance is going graphically, how industry sectors are being defined."
Managers also use the software
Money managers also are using portfolio accounting software. Wasatch Advisors Inc., Salt Lake City, is getting "good feedback" from clients on its new performance reports. Wasatch switched from an "old UNIX-based" portfolio accounting software to Axys II portfolio accounting system, said Dwight Ricks, chief information officer. Since adding Axys II and Moxy from Advent Software Inc., San Francisco, Wasatch has cut the time it takes to do billing from two days to two hours or less, said Mr. Ricks.
The time it takes to allocate stock trades among multiple accounts has been reduced to 45 seconds from two hours, he said.
Money manager Lynch & Mayer Inc., New York, is looking for a replacement for its existing accounting software. It wants a system that will provide one database for reporting, accounting, billing and trading, said Peter Wen, investment analyst.
An integrated system with only one database will reduce the possibility of an error in handling data, said Mr. Wen.
Another concern is that the current system can't cope with the changeover to 2000.
Lynch & Mayer executives want to have a new system fully installed before January 1999.
Lynch & Mayer is testing IMS for Windows, portfolio accounting and management software from INDATA, Greenwich, Conn. But the firm also is considering other systems.
The mutual fund company Zweig/Glaser Advisors, New York, has decided to license the accounting software PAM for Mutual Funds.
A key reason: performance attribution analysis, said Carlton Neel, first vice president and portfolio manager at Zweig/Glaser.
Weiss, Peck & Greer, New York, replaced a proprietary in-house portfolio accounting system with Boston-based Thomson Investment Software's PORTIA Advanced Platform Option, said Barry Levine, senior vice president and director of information systems.
The firm installed the system seeking improved integration of its electronic systems and the newest technology.