Total fund portfolio management begins and ends with the portfolio database. Regardless of whether it is a pension fund, endowment, foundation or any other pool of capital the investment process begins by identifying what the fund owns.
This process could include data from the custodian, security pricing from vendors and in some cases information from asset managers themselves. Identifying data is necessary but not sufficient. The data needs to be aggregated from different sources into a total fund exposure view. This enables the investment protagonist – the CIO, the Investment Officer, the OCIO or Portfolio Manager – to provide oversight of the portfolio and make informed investment decisions both from a capital allocation and risk allocation framework.
A Portfolio management dashboard that provides this aggregate view would be a valuable investment tool for capital allocators. Such a dashboard should include a robust database that provides historical total fund exposures such that investors know what they own today, what they owned yesterday, what they owned last month or last year. This historical view is also critical to attribute the investment performance of the total fund in terms of the decisions made by the capital allocator. The portfolio management dashboard will need to communicate with a risk system to determine the risk exposures of the fund and have the flexibility to allow the capital allocator to test scenarios of various allocations.
Once the decision is made in terms of fund allocations the dashboard should enable the portfolio manager to make the desired allocation changes in a systematic manner across multiple portfolios if necessary by communicating the trade information to the appropriate order management system. The investment process would typically include the trade execution function where any individual trade or trade allocation is executed in the best manner possible. The results of the trade execution or trade allocation are exported back to the portfolio database for inclusion in the final portfolio exposure view.
This closed loop process where the portfolio exposure data starts with the database, the trade or capital allocation decision is made in the portfolio management system with the aid of a risk analysis system, then executed in a trade order management system and the final trades are reported back to the database is a robust framework for making institutional investment decisions. The closed loop investment process is critical for providing the right governance and oversight of institutional portfolios. Capital allocators should strive to create a closed loop investment process as a foundational methodology to fulfill their fiduciary duties.