The rise of the multimanaged fund

As the pension landscape evolves, the question of optimizing returns from investments becomes ever more crucial.

As a result, we have witnessed the rise of the multimanaged fund model leading to an influx of service providers across the value chain. In combination with increasingly difficult market conditions, this has made the hunt for yield/alpha ever more difficult. Pension funds have to go further afield to generate the returns they need to cover their liabilities. It is now the norm for pension funds to “farm out” their portfolios to a zoo of specialist “best of breed” subfunds (for instance, 10% to a private equity fund, 15% to a fixed income fund, etc.) in order to achieve their objectives.

For all the benefits of the multimanaged approach, it also has created a big, new problem. These various funds and service providers inevitably operate under (sometimes subtly) different accounting systems and business processes. In most cases they will all be simultaneously “correct” (or at least not incorrect) but they will nevertheless produce outcomes that differ in small yet material ways. The result has been a dramatic increase in the complexity of accounting for pension funds, accompanied by a greater need for more frequent valuation and reporting. Analyzing, consolidating and reconciling investment portfolio information from these multiple sources across multiple asset classes has become a real headache for pension funds — old, often manual, spreadsheet-based systems are simply not up to the task in most cases.

The potential negative consequences are considerable. Failing to independently consolidate the information according to a single standard inevitably will lead to an accumulation of errors and inconsistencies that, while individually small, will eventually snowball and hit returns. On the other hand an inefficient solution — such as attempting to perform the appropriate reconciliation with old, manual processes — can cause a pension fund's administrative burden to balloon. This can, in turn, needlessly drive up costs, further eating into returns.

Furthermore, it is crucial that plan participants are able to reliably determine the value of their account on a regular basis. This need is only being exacerbated by a global regulatory trend toward increased transparency and oversight. Whether the Dodd–Frank Wall Street Reform and Consumer Protection Act in the U.S., FATCA across the globe, or AIFMD in Europe, all require much more robust monitoring and regular reporting as a matter of basic compliance. So how can pension funds ensure they meet this need without paying too high a price in terms of increased costs and fees?

What is required is the consistent application of a single accounting approach to underpin accurate portfolio valuations. The answer to achieving this, as with many things in our modern world, lies partly with technology and automation — namely the adoption of a master accounting system at the pension fund level.

Adopting a master accounting system entails taking on portfolio positions at inception date and thereafter processing transactions in parallel with the underlying fund manager systems. This results in a single consolidated current record with comprehensive fund accounting for all portfolios in a multimanaged fund. It ensures consistency and independence of instrument pricing, corporate actions processing, and accounting treatment. Daily accrual of income and expenses supports unitization, and hard valuations of all portfolios enable daily transacting and reporting (or any other frequency as required). The resultant data can be used to monitor compliance, risk and performance at the level of individual investment managers and to ensure the aggregate portfolio remains aligned with broader investment objectives. Additional monitoring and reporting solutions can be added on top to further facilitate and automate these activities.

A further key benefit — perhaps one more readily appreciated following the Bernard L. Madoff scandal — is the master accounting approach results in an effective segregation of the key activities of investment management and fund accounting, reconciling portfolio positions to the records of the asset custodian on a daily basis. Master accounting solutions typically provide a comprehensive range of scheduled reports on a regular basis — the availability of a single, consolidated record across the fund facilitates the preparation of annual financial statements, resulting in significant reductions on audit fees.

The shift to the multimanager model represents a step forward — the creation of a more sustainable, efficient system for ensuring pension funds are able to generate sufficient returns for their participants' retirement years. Yet unless these changes are met with a more sophisticated, automated approach to accounting, pension returns ultimately will be short-changed by the march of progress.

Andre Le Roux is a Cape Town, South Africa-based head of business development for Africa at Maitland Group.