The Missing Link: Operations Improvements

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The Missing Link: Operations Improvements
Enhance Portfolio Performance
No. 1 in a Series

Chandresh Iyer
Head of Global Custody and Investment Services
Citi

Chito Jovellanos
President & CEO
forward look, inc.

The coming decade will be a difficult one for institutional asset management. A vastly more crowded market for investment and trading ideas, more constraints on leverage, demands for greater transparency, changing compliance rules and more risk-averse investors will ensure that the heady days of relatively easy alpha and benchmark-beating strategies will be much harder to sustain. Will this be the “new normal”? The

This definitive analysis demonstrates

emerging consensus is best expressed

how improved investment operations

by Blackstone Group cofounder

contribute anywhere from 50 to

Pete Peterson (in a December 2009

250 basis points (bps) in realized

McKinsey interview), who sees “the

portfolio performance. Moreover,

center of gravity of the business

we show the relative contributions

shifting from financial engineering

of each of a number of components

to operational improvements.”

of investment operations to overall
performance alpha, and discuss

A 360o View of
Operational Quality
Andre Perold’s seminal work
related to implementation shortfalls
(“The Implementation Shortfall:
Paper Versus Reality,” Journal of
Portfolio Management, 14(1): 4-9,
1988), coupled with more recent
work by Ananth Madhavan while

Citi Investor Services has been at

how investment managers can best

the nexus of investment operations

improve their operational capabilities

for several decades. In our ongoing

in support of alpha enhancement,

dialogues with investment managers,

regardless of the company’s operating

firms have consistently expressed

model — be they traditional 40 Act

the need to better understand how

complexes, retail SMA managers,

operational efficiency contributes

institutional managers or alternative

directly to portfolio performance.

investment firms. We conclude

Although they have seen how

with insights drawn from Citi’s

outsourcing has reduced costs and

deep experience in the delivery

engendered workflow effectiveness

of Business Processing

at their firms, the direct link between

Investment operations is,

Outsourcing (BPO) services

operations quality and portfolio

however, a vastly broader arena.

to investment managers.

“Operations” spans the gamut from

performance has so far been elusive.

at Barclays Global Investors (“The
Value of Transaction Cost Forecasts:
Another Source of Alpha,” Working
Presentation — Guttman Center for
Portfolio Management, University
of Vienna, 31 pages, 2006) had
clarified a piece of the puzzle as
relates to best execution and the
impact of opportunity cost on alpha.

1

order management, settlement,

Failure of the Fund Accountant

important, all other elements

reconciliation, accounts servicing,

to provide timely instructions to

surrounding these investment

securities lending and compliance

custodians to move investment

manager operations had to have

to trade execution, custodian and

proceeds into a margin account to

remained constant. This approach

prime broker communications and

enable today’s short sales

provided a form of a posteriori

fund accounting. These different yet

Step-out settlement fail causing a

control where only the effects

complementary elements make up the

position break preventing trading at

from one imputed variable were

complex web that defines the totality

a critical market opportunity

examined. The data screen resulted

of an investment operation. Intuitively,
the quality of all these facets of an
operation at an investment manager’s
firm must support and enable the
desired outcome — namely portfolio
outperformance of its...
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