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How asset allocators can rise to the challenge in 2021

2020 brought economic uncertainty and low interest rates as governments sought to stimulate spending.

And these challenges are likely to continue well into 2021 as lockdown measures, vaccine development and the wariness that comes with the start of a new US administration drive markets this year.

More than ever, asset allocators are under pressure to optimise returns, but many face operational obstacles.

At the moment, institutional investors are having to work even harder to achieve their targeted returns, so it’s imperative they have the capabilities to seize opportunities when they come.

In the search for returns, investors are looking to integrate more alternative asset classes, such as real estate and private equity, into portfolios, writes Randal McGathey, vice president, Milestone Group.

Therefore, investment platforms must be inherently capable of both ‘holding’ those asset classes and transacting on them.

End system fragmentation

The new environment also requires asset allocators to be incredibly agile in the management of their portfolios, ensuring they have an all-encompassing view of their asset allocation – no easy task given the increasingly complex nature of the investment industry.

Having a complete view in this way enables fund managers to quickly shift their portfolios more easily in reaction to the latest news, managing their exposure.

It’s difficult to do this effectively using manual and fragmented systems, which is a common problem considering the prominence of spreadsheets among many global, multi-asset firms.

We recently conducted a survey of 57 asset owners and investment managers across a range of AUM, with 14 having less than $500m under management, and 13 over $25bn.

This research found that half of respondents were using four or more systems for monitoring portfolio exposures alone and some using as many as 13 different systems/providers across all investment functions.

The asset allocation function cannot be efficiently optimised in such a scenario, particularly from an agility standpoint.

The key to solving the problem of fragmentation will be the integration of technology systems, bringing together portfolio managers and investment operations teams with a single view.

With this, institutional investors can monitor and adjust asset allocation with ease and flexibility.

Pay now, or pay for it later

The current environment has shown that firms cannot rely on legacy technology any longer if they want to progress during these challenging times.

Organisations can be hesitant to make major systems changes out of concern for high costs and business disruption. However, while there is the risk of short-term business disruption and costs, the long-term benefits are significant.

Randal McGathey

There is no doubt that the current economic environment requires proficient asset allocation in not only mitigating risk but generating returns.

Yet, many institutional investors aren’t equipped to handle this situation, with fragmented systems reducing their ability to adapt.

But they will be well served to not delay system changes – for the sooner they make their move, the bigger the benefits they will reap.

This article was written for Expert Investor by Milestone Group.

Part of the Bonhill Group.