Unveiling the ROI Dilemma: How Data Blind Spots Impact Asset Owners’ Bottom Line

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Read more about author Bryan Yip.

In today’s fast-moving investment world, corporate and insurance asset owners are operating in the dark, hindered by the absence of a standardized industry benchmark for an overall asset performance assessment. Asset owners usually have many other responsibilities beyond managing portfolio strategies, affecting their ability to allocate time to comprehensively evaluate and optimize the performance of their money managers. To further exasperate the problem, when corporations manage their own money, they often default to the safe zone of asset management, leaving valuable returns on the table.

The current methods asset owners employ to assess their portfolio strategies and performance heavily depend on imperfect, lagging, disparate sources of information, including word-of-mouth, custom benchmarks, and discussions within private networks. This lack of truly comparative data limits transparency and the asset owners’ ability to formulate confident investment strategies with their money managers. As a result, the underperformance and loss of potential gains could detrimentally impact the entire return on investment (ROI) for asset owners. 

A recent report published by my company revealed that the average corporate portfolio returned over 3% in just the last two years. This begs the question, how does your organization compare?

The ROI Dilemma Poses These Problems

  1. Challenges in Objective Decision-Making: The practice of using benchmarks set by money managers places asset owners in a precarious position, making it difficult to impartially assess performance. This lack of objective standards can deter treasury teams from proposing necessary strategy adjustments, as convincing board members without clear, standardized benchmarks becomes a formidable task. This may lead to overly conservative portfolios as companies are not actively monitoring the potential gains that can be achieved.
  1. Reliance on Word-of-Mouth and Private Network Discussions: Due to the lack of information, some executives rely on private network discussions on investment decisions. They are unable to truly understand how they either over or underperformed the market or industry benchmark. The dependency on money managers for information only adds to the opacity. Asset owners are left in the dark about the strategies executed within their portfolios, hindering their ability to assess and optimize performance. This lack of transparency directly translates into missed opportunities.
  1. Custom Benchmarks: Often created and used by money managers, custom benchmarks create further opportunity costs. These benchmarks, designed around an “ideal portfolio mix,” inherently embody a subjective notion of what is considered “ideal” – a perspective that varies significantly depending on who selects the benchmark. This practice complicates the process for asset owners attempting to gauge their performance against standardized industry benchmarks, ultimately providing them with a fragmented view of their portfolio’s true performance.

The Path to a Standardized Industry Benchmark

Trying to solve these issues is no easy task. But it can be accomplished by integrating technology that is capable of tackling a couple of key tentpole elements that can eliminate blind spots and empower asset owners with unparalleled visibility into their portfolios. 

Generating Apples-to-Apples Comparisons

True apples-to-apples peer comparisons are central to increasing transparency and enabling organizations to make better data-driven decisions, which in turn leads to optimized performance and an enhanced ROI.

Financial organizations need to focus on finding ways to use technology in a way that illuminates the significance of asset allocation and its impact on returns through detailed examples, such as examining the influence of different credit profiles among peer organizations. If, for example, peers with more aggressive credit ratings are still achieving better returns by embracing higher risks within the confines of their investment policies, it suggests a potential strategy adjustment for your organization. Platforms need to facilitate a collaborative approach with money managers to fine-tune investment strategies, leveraging insights drawn from these comparisons. Additionally, platforms need to allow for the customization of peer groups, enabling organizations to benchmark against those with similar credit standings or risk strategies, ensuring a focused and relevant analysis.

Visibility of Macro-Trends

High-performing organizations are focused on understanding macro-trends that cause market movements. Having a platform that can show you what asset classes companies are investing in during any given market event can be the difference between capturing incremental yield or missing out. Word-of-mouth trading doesn’t allow you to capture this, as it’s typically too late to capture a material return once you hear about these events.

With another year of interest rate changes on the horizon, understanding macro-trends can be the difference between correct investment or underperforming ones. Properly evaluating money managers becomes critical in capitalizing on opportunities. 

To boost financial decision-making, tailored data for decision-makers in treasury departments managing multiple money managers is crucial. Therefore, any technology that is deployed needs to enable organizations to take control of their investment data, eliminating subjective information and providing validated comparisons against industry leaders.