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.