Post Summary
The third installment of Convergence's annual Operational Due Diligence survey series, covering institutional investor ODD practices with respect to alternative asset allocations, released in March 2019.
Evans stated, "We are seeing some consistent trends over the last 3 years. CIOs are clearly recognizing the parallel risk in Operating Risk along with Investment Risk."
Current and new manager allocations remained steady versus 2017, while dedicated resources, people and technology, increased only marginally.
Investors should review their processes for evaluating and monitoring managers' service provider relationships, with private equity managers expected to continue increasing their use of outsourced service providers, making service provider "best fit" a key consideration.
Phinney stated, "We are helping our clients measure and standardize Advisor Regulatory, Compliance and Event Risk. We help them detect material changes in an Advisor's business."
Convergence releases 2018 ODD survey results, revealing continued regulatory focus and increasing manager operating complexity.
Convergence Inc. has released the annual results of their 2018 survey focused on Operational Due Diligence (ODD) practices and processes with respect to investment allocations by institutional investors to alternative assets. Survey participants included a cross section of institutional investors with respect to type of investor (e.g. funds of funds, pensions, endowments, etc.), amount and number of investment allocations to external managers and amount of new annual allocations to external managers. "We are seeing some consistent trends over the last 3 years," noted Co-President George Evans. "CIOs are clearly recognizing the parallel risk in Operating Risk along with Investment Risk."
Based on survey respondents' observations, Convergence noted the following:
Given continued regulatory focus and increasing manager operating complexity, investors should refresh their evaluation of the level of resources (staff and/or technology) dedicated to Operations Due Diligence, as well as their own current written policies and documentation requirements from managers. Current manager and new manager allocations remain steady versus 2017, but dedicated resources (people and technology) have increased only marginally. Tool sets provided by Convergence lend themselves to small to medium-sized ODD teams challenged by capacity and bandwidth.
Investors should consider reviewing their level of focus and current processes for evaluating managers' assessment and monitoring of service provider relationships, including manager practices of ongoing monitoring of their service providers. Private equity managers will likely continue to increase their level of outsourced service providers, underscoring the need for this review. Service provider 'best fit' is a key consideration.
With the considerable increase in new products and new avenues for product distribution by managers, investors should reevaluate those data points, metrics and sources of information for assessing manager operational complexity and risk. Consideration should be given to appropriate weighting of risk areas for scoring purposes, and scoring processes should be considered by those not presently doing so as part of their ODD process. Complexity and Risk profiling is paramount to active management of an Advisor.
Although 100% of respondents indicate their organization views ODD as a "value adding" activity that can improve returns and manage portfolio risk, this area is one in which investors may slowly continue to build resources, processes and technology. Investors should consider a complete review of dedicated resources and tool sets in the marketplace for varied aspects of initial ODD and ODD monitoring and make spending decisions consistent with their assessment of risk across their portfolio, recognizing that manager risk profiles are in constant change.
Co-President and CEO John Phinney also noted, "We are helping our clients measure and standardize Advisor Regulatory, Compliance and Event Risk. We help them detect material changes in an Advisor's business."
About Convergence
Convergence has developed a data, analytics and surveillance platform that provides transparency and easily accessible information relating to the business operations and infrastructure of alternative asset managers. Convergence products include technology-based tools used to facilitate manager and industry research, analytics and surveillance across the universe of registered investment advisors, including assessment of their operating and business risk profile, comparisons to peers and competitors, and analyses of their service providers. The company's platform includes dynamic data and analytics on 35,000 advisors and over 150,000 funds. Also included is the industry's ecosystem of 6,000 service providers. The platform includes more than 4,000 data points from regulatory filings, news sources and a significant amount of derived analytics and proprietary original content – most notably advisor operating model risk ratings and complexity.
Institutional investors use the company's products to research advisors and their business models with a focus on operational, compliance and event risk prior to and throughout investment allocation. Convergence products benefit institutional investors focused on employing a dynamic, data-based on-going process of manager and advisor surveillance. Predictive Analytics enables a forward looking view of the Advisor.
More information can be found at convergenceinc.com or by contacting George Evans for additional inquiries or questions pertaining to Convergence, its products or this ODD survey.
Key Points
What was the scope of the 2018 ODD survey?
- Survey participants spanned a cross section of institutional investor types: The release states participants included funds of funds, pensions, endowments, and other institutional investor types.
- Participants were evaluated across three dimensions: The release states participants were assessed on type of investor, amount and number of investment allocations to external managers, and amount of new annual allocations to external managers.
- This was explicitly framed as the third year of consistent findings: George Evans stated, "We are seeing some consistent trends over the last 3 years."
Evans connected the findings to a specific risk framing: Evans stated, "CIOs are clearly recognizing the parallel risk in Operating Risk along with Investment Risk."
What did the survey state about the relationship between manager allocations and dedicated ODD resources?
- Manager allocations remained steady compared to the prior year: The release states current manager and new manager allocations "remain steady versus 2017."
- Dedicated resources increased only marginally over the same period: The release states dedicated resources, defined as people and technology, "have increased only marginally."
- The release recommends investors refresh their resource evaluation: Investors are advised to refresh their evaluation of staff and technology resources dedicated to ODD, as well as current written policies and documentation requirements from managers.
- Convergence's tool sets are described as suited to smaller teams: The release states Convergence's tool sets "lend themselves to small to medium-sized ODD teams challenged by capacity and bandwidth."
What did the survey state about service provider oversight?
- Investors are advised to review their service provider evaluation processes: The release recommends reviewing the level of focus and current processes for evaluating managers' assessment and monitoring of service provider relationships.
- This includes managers' own ongoing monitoring practices: The recommendation specifically covers manager practices of ongoing monitoring of their service providers.
- Private equity managers are cited as a growing area of relevance: The release states PE managers "will likely continue to increase their level of outsourced service providers."
- Service provider "best fit" is named directly: The release states, "Service provider 'best fit' is a key consideration."
What did the survey state about complexity and risk scoring?
- Product and distribution growth is cited as the reason to reevaluate scoring inputs: The release ties its recommendation to "the considerable increase in new products and new avenues for product distribution by managers."
- Investors are advised to reevaluate underlying data points and metrics: The recommendation covers the data points, metrics, and sources of information used to assess manager operational complexity and risk.
- Risk weighting is named as a specific consideration: The release states "appropriate weighting of risk areas for scoring purposes" should be considered.
- Formal scoring is recommended for investors not already using it: The release states scoring processes "should be considered by those not presently doing so as part of their ODD process."
- Complexity and Risk profiling is described using specific language: The release states, "Complexity and Risk profiling is paramount to active management of an Advisor."
What did the survey state about how investors view ODD's value, and what did John Phinney say about Convergence's role?
- 100% of respondents called ODD value-adding: The release states 100% of respondents indicate their organization views ODD as a "value adding" activity that can improve returns and manage portfolio risk.
- The release notes this area may still build slowly: Despite unanimous agreement on value, the release states "this area is one in which investors may slowly continue to build resources, processes and technology."
- Investors are advised to align spending with portfolio-wide risk assessment: The release recommends a complete review of dedicated resources and tool sets, with spending decisions consistent with the investor's own assessment of risk across the portfolio.
- Phinney's quote frames Convergence's specific role: Phinney stated, "We are helping our clients measure and standardize Advisor Regulatory, Compliance and Event Risk. We help them detect material changes in an Advisor's business."
What platform figures did Convergence state in this 2018 survey release?
- The platform covered 35,000 advisors: As stated in the release's "About Convergence" section.
- The platform covered over 150,000 funds: As stated in the same section.
- The platform's service provider ecosystem covered 6,000 service providers: As stated in the same section.
- The platform included more than 4,000 data points: Sourced from regulatory filings and news sources, per the release.
- Advisor operating model risk ratings and complexity are named as the platform's most notable proprietary content: As stated directly in the release.