While we all know that ‘past performance is not a reliable indicator of future performance’, a look back at 2023 might be helpful when considering what 2024 might bring to the world of investment operations and data management.
Stephen Huppert, AlphaCert Independent Consultant walks us through 2023 and what we may expect from 2024 with commentary from AlphaCert Head of Product James Milne and AlphaCert COO Scott Taylor.
The funds management industry across Australia and New Zealand is heavily powered by the superannuation sector. With the superannuation system fed by compulsory contributions (11% employer contribution in Australia and 3% in New Zealand), this steady flow of new money and the continued consolidation trends see Australian and New Zealand funds in the top pensions globally. In Australia in particular the managed funds industry passed $4.5 trillion in 2023, with nearly 80% of these assets in superannuation funds.
Scale—and its impact
This scale brings significant challenges for the investment teams along the entire value chain. Funds are asking: is my operating model fit for purpose, and do we have the investment data platform capable of supporting it?
Most funds are finding answers to this question through digitalisation, internalisation and internationalisation.
Digitalisation
Digitalisation is taking over from digitisation, converting analogue processes and data management to digital ones. Digitalisation seeks to use new technologies to fundamentally change processes and data management, thereby bringing about a true digital transformation.
A robust business architecture is essential to sufficiently plan and prioritise change initiatives at the right time. The AlphaCert Guide to Using Business Architecture provides an overview and goes into when to use it and how to get started.
Internalisation & Internationalisation in Australia
Particularly relevant for the Australian market, traditionally Australia’s superannuation funds have relied on an outsourced model of investment management and have had a significant home-country bias. With AustralianSuper leading the way, we now have hundreds of employees managing hundreds of billions in-house, and more and more of these employees are in international offices of the funds. At its recent Annual Members meeting, AustralianSuper said, “Over the last seven years, [internalisation] has saved members more than $1 billion”.
This need to look offshore is hardly surprising given the total assets managed by the superannuation industry are now over $3.5 trillion, and the entirety of the ASX listed market is around $2.3 trillion. A recent super insights report showed that offshore investment allocations rose to 47.8% in 2022, up from just 46.8% in the previous year.
However, internalisation and internationalisation also bring complexity and risk. Paul Newfield, Frontier, recently warned that “While both are important to deliver value, insights and efficiency, they both have the capacity to bring material risks into a large asset owner”.
Organisations can use the AlphaCert Data Management Maturity Model to help answer questions such as “How are we doing with our investment data management?” and “What should we do next?”
Regulation—governance and transparency
It has become a bit of a cliché in the superannuation and investment management industry that the only certainties are death, taxes and regulatory change.
For Australia, the updated Investment Governance Prudential Standard, SPS 530, commenced operation on 1 January 2023, focusing on superannuation fund trustees maintaining a sound investment governance framework that focuses on managing relevant risks and returns. The Australian Prudential Regulation Authority (APRA) finally released its prudential practice guide, PPG 530, in July 2023, setting out its requirements concerning investment governance for an RSE licensee’s business operations.
The main changes in the revised SPS 530 relate to stress testing, valuation and liquidity management practices. All of these areas require a strong data foundation. PPG 530 says the comprehensive investment stress testing program must include, amongst other things, processes for ensuring that superannuation funds use relevant and reliable data in investment stress testing.
Also from APRA is Prudential Standard CPS 230 for Operational Risk Management. Even though it doesn’t come into effect until July 2025, financial services institutions have a significant task ahead to ensure compliance across operational risk management and will need to demonstrate:
- Clear management of operational risks
- Documentation of processes and resources needed to deliver critical operations, including people, technology, and service provider(s)
- Regular scenario analysis, risk profiling and assessments.
While APRA raises the bar on governance, the Australian Securities & Investments Commission (ASIC) has been raising the bar on disclosure with a particular focus on greenwashing. Several funds have been taken to task and fined for the practice. ASIC has said that greenwashing will continue as one of its 2024 enforcement priorities.
For New Zealand, the Financial Markets Authority (FMA) monitors and regulates New Zealand’s financial markets and overall wealth management industry taking influence from the Reserve Bank of New Zealand. Over 2023 disclosure and the importance of the disclose register has become more important for funds to consider in their operations. All New Zealand funds are now required to disclose several details to the New Zealand Financial Markets Association (NZFMA) on a quarterly basis. Funds are required to disclose their full portfolio holdings, disclosure, return data, fund data and website references including quarterly fund updates, PDF overviews etc.
Standards for designated Financial Market Infrastructures (FMIs) have also been issued by the Reserve Bank of New Zealand and FMA which come into effect 1 March 2024 and is a regulatory regime for designated FMIs.
Also of note was the consultation agreement signed between the FMA and The Financial Markets Standards Board (FMSB). The agreement formalises cooperation between the entities and reinforces the FMA’s support for the primary objectives of FMSB. While industry standards will not replace obligations under New Zealand law, the agreement will facilitate consultation in the development of draft guidance in future.
Emerging technologies—hype or something more?
The year of ChatGPT
In 2023, it was impossible to go to an event or look at social or print media without hearing or reading about ChatGPT. It is easy to forget that it was only released to the public on 30 November 2022.
We saw headlines such as “AI will eventually be able to do everything a junior investment analyst can do,” and “AI Can Make Investment Decisions More Intelligent”. The reality is yet to emerge, but ChatGPT tells us that it can do a great deal in investment management, including:
- It can gather and analyse a wide range of market data, news, and trends from various sources, providing summaries and insights that can aid in investment research.
- It can assist in portfolio optimisation by providing insights into asset allocation, risk assessment, and performance analysis based on historical data and current market conditions.
- It can engage with clients, answer their queries about investments, provide updates on portfolios, and offer personalised investment advice based on their risk tolerance and financial goals.
- Using historical data and market trends, it can help identify potential risks associated with specific investment strategies or assets and suggest risk mitigation strategies.
- Analysing social media, news articles, and other textual data can help gauge market sentiment. It can provide sentiment analysis reports to aid in decision-making.
- It can assist in developing and refining algorithmic trading strategies by processing large datasets and identifying patterns that human traders might overlook.
- It can generate customised investment reports, performance summaries, and market updates, saving time for analysts and advisors.
- It can be utilised to create interactive learning materials or simulations for investors to understand financial concepts, investment strategies, and market dynamics.
- It can assist in ensuring compliance with financial regulations by providing information on legal requirements and helping in the interpretation of complex regulatory frameworks.
- Using machine learning techniques, it can assist in predicting market movements, asset prices, or economic indicators based on historical data and current market conditions.
- It can review and analyse financial reports, prospectuses, and other documents to extract relevant information and trends that could impact investment decisions.
- It can provide real-time alerts and insights on sudden market movements, news, or events that might impact specific investments or the overall market.
The significance of leveraging technology such as generative AI is not to replace human capabilities but to aid productivity and create opportunities for additional value. With the emergence of AI, there is opportunity to increase efficiency, accuracy and productivity in managing investment data.
Asset tokenisation—the next big game changer?
Asset tokenisation involves representing the ownership rights of real-world assets as digital tokens on a blockchain. Over 10 years since the hype of blockchain, Boston Consulting Group forecasts that, even in a ‘highly conservative’ scenario, $16 trillion of assets will be tokenised by 2030. That will represent 10% of global GDP. Many investment management organisations are already on board, and more will follow suit in 2024.
Looking ahead—2024 and beyond
The easy answer is more of the same. There is nothing to suggest that the primary concerns and areas of focus for investment management organisations in 2023 will not be the same in 2024 and beyond. However, anyone who has been through the cycles knows to expect the unexpected. The best way to prepare is to have an operating model and sound investment data management practices capable of withstanding the inevitable shocks, whether in capital markets, technology or the broader environment. Who saw COVID-19 coming?
We need to be humble and acknowledge that attempting to predict the future is all but impossible, but preparing for plausible futures is essential.
We often hear that we need to be resilient rather than fragile in the face of volatility and uncertainty. Whether considering our investment portfolio or the operating model that supports it, it is worth following the advice of Nassim Nicholas Taleb, who popularised the concept of the Black Swan event. He sees the opposite of fragility, not sturdiness or resilience. He introduced the concept of being “antifragile”, which he explains is the ability to thrive and improve in the face of disorder. So that is our challenge for 2024—to become an organisation ready for whatever comes and to be well-positioned to welcome volatility and uncertainty. Because ready or not, it will come.