Fintech brings data alive for Wisconsin fund

The State of Wisconsin Investment Board tapped into the expertise of financial technology firms in creating the new single reporting platform for its approximately $74 billion in internally managed assets.

In September, Madison-based SWIB, assisted by fintech adviser Citisoft, completed a four-year program to integrate data from its various investment asset classes into a single reporting format, combining risk-management and investment performance data for its internally managed assets. The transition was done at a total cost of $48 million, "on time and under budget," said Vicki Hearing, SWIB spokeswoman.

As of Sept. 30, the state investment board managed a total of $115.8 billion in assets, including $105.5 billion for the Wisconsin Retirement System.

The new reporting format allows SWIB to move "from siloed investment technology to a sophisticated asset-class and risk-aggregated model," said David Villa, chief investment officer, in a Sept. 19 news release announcing the completion of the program.

SWIB's move highlights what sources said was a trend among institutional investors to use technology to provide a more holistic current assessment of ​ performance and risk measurement beyond monthly audited reports provided by custodians and fund administrators.

"It's a rethink of how you get serviced," said Josh Smith, co-founder and CEO at Solovis Inc., a Dallas portfolio management reporting and risk analytics software developer that targets endowments and foundations and pension funds.

Added David Bates, managing partner, North America, Citisoft, Boston: "We've seen more interest and have engaged with health-care companies and pension plans about technology and operational needs and how to marry them." Citisoft advised on and implemented SWIB's shift to a custom reporting program.

The same need for more accurate and timely reporting also applies to money management, particularly active managers, Mr. Bates added. "You can make a parallel to (money) managers that need to reposition their value proposition as an active manager," Mr. Bates said. "What is the value that an active manager can bring to an institutional investor? It's trending toward risk aversion as well as alpha generation. Managing risk is becoming a value proposition to managers as well."

The adoption of this kind of technology isn't necessarily a repudiation of services provided by custodians but allows asset owners to enhance what they are already getting, said Farris Qunibi, vice president, marketing, Novus Partners Inc., a New York portfolio analytics software provider for money managers, pension funds, endowments and foundations. "Fintech firms won't replace custodians anytime soon, but what we're doing is more targeted. … You'd be shocked to see how poor the data is," he said, adding "We don't view custodians as competitors at all."

Mr. Smith at Solovis said while custodians have evolved to provide administration services to owners of alternative assets such as private equity and hedge funds, combining the data from those alternative investments with traditional asset data from equities and fixed income has been left to the asset owner.

"(Custodians) are really a service provider existing explicitly for direct securities," Mr. Smith said. "Everything they've created has been a siloed evolution from a direct security framework. So, as private equity became a thing, they spun up private equity; as derivatives did, they spun up derivatives. As people invested more and more, they took technology from each of those groups and incrementally added that. But since the base is still direct securities, if I'm an endowment and dealing with a custodian, I have to aggregate all that together. You never get a cohesive view. It's not that custodians don't have some of this; it's just that they can't put it together. It's a silo problem and an abstraction problem — to abstract useful data from a private equity fund directly, for example. … It requires an investment perspective, knowledge of why (asset owners) are investing in this. We get managers to template all this."

Mr. Qunibi said for his firm, the biggest competition is Microsoft Excel — meaning that the toughest part is changing asset owners' established reporting processes away from manual consolidation. "Hundreds of man hours are wasted each year (at asset owners) in-house, using internal workbooks and models that have many errors inputted by people," Mr. Qunibi said. "People can get intimidated with new technology and workflows, so they might stick with what they have. But that opens up even more errors.

"We're entering a new era where understanding investments is super important, not just for allocating capital but as a massive fiduciary duty, to be able to show performance at different levels of the portfolio," Mr. Qunibi added.

At SWIB, the move to integrate data across its multiasset investment portfolio dovetailed with its increase in internally managed assets, to 65% currently from 21% in 2007, according to a presentation by SWIB and Citisoft released last month. Increasing internal management and incorporating risk management into the portfolio "placed increasing demands on the (board's) legacy operations and technology, requiring a new approach to support the needs of the front, middle and back offices," the report said.

The new program allows SWIB to assess risk across its entire asset allocation — 29% fixed income, 26% U.S. equity, 24% international equity, 8% private equity, 6% real estate, 4% other alternatives, and 3% cash and other investments, all as of Dec. 31, according to Pensions & Investments' data.

SWIB's technology transfer enables it to carry out "an investment strategy that focused on managing risk across the entire trust, with data that would provide daily information and the capacity to view assets across diverse investments in a timely manner," Citisoft's Mr. Bates said in an interview. "Its legacy systems didn't have the functionality to view assets across the same kind of views and data. They were segmented by asset class. The timing of data came out based on its monthly investment book of record and required a lot of manual work on the part of SWIB to make sense of it."

The system the state investment board now uses allows it to "focus the human capital at SWIB on investment oversight and data quality and less on data and transaction processing," Mr. Bates added.

Such a performance and risk analytics system meets the mandates of pension funds like SWIB "not only to generate alpha but to protect their assets in case of market turbulence," Mr. Bates said. "The ability not only to assess risk on a daily basis but also to manage on a risk-conscious basis requires the timely ability to view data across all asset classes in the portfolio."

The system implemented by the Wisconsin board has not affected its relationship with its longtime custodian, Bank of New York Mellon Corp. In fact, as part of the four-year reporting improvement program at SWIB, the board in November 2016 began using enhanced middle-office services from BNY Mellon and Eagle Investment Systems LLC. Eagle, BNY Mellon's fintech subsidiary, provides data warehouse services, portfolio accounting, trade support, corporate actions, collateral management, pricing, performance measurement and derivatives processing.

BNY Mellon has been SWIB's custodian since 1991.

"We expanded our relationship with BNY Mellon ... to leverage the strategic investments we've made through our long-standing relationship," said SWIB's Ms. Hearing. "This supported our transition away from siloed investment technology to an asset-class calculation and risk-aggregated model."