Barnaby Nelson: How are asset owners driving change across their investment operations today? Welcome back to this #vxinsight podcast, and to this new miniseries that’s designed to map out the transformation journey that the world’s asset owners are on today.
Leveraging the extensive research that we’ve been running over the last several months as part of our asset owner transformation campaign, our aim in this series is to take you through the whole journey, from the macro considerations that asset owners are facing, all the way through to exactly how their change projects are being managed and executed on today.
Over the next four episodes, leading experts from the Milestone Group, RBC, Citisoft, and Adapa Advisory will look at the limitations of the current operating model that asset owners rely on today; will look at the external pressures that are driving them to consider change; will look at the factors that asset owners have in mind when they’re designing their change projects; and then finally, will look at exactly how those projects are being executed, including what types of technology are being used and what makes up the case for change.
So if you’re part of the change journey in the industry today, then these discussions will, honestly, make for indispensable listening. We really hope that these will help you to map out your own transformation better, equipped with the considerations and the experiences that our team has built up.
Now these podcasts accompany a detailed asset owners transformation report, which is available at thevalueexchange.co, which includes all kind of statistics, insights, and thoughts from asset owners around the world. So make sure you download that. And let’s get on with the podcast.
So, we’re really excited today to have some real specialists joining us to walk through the first of our four podcast episodes on asset owner transformation, this one really focusing strongly on the question of Excel and the journey away from Excel, and the overall question of efficiencies within asset owners today.
So joining us, it’s really exciting to have Marian Azer from the Milestone Group, Ryan Silva from RBC, Christine Knott and Dave Higgins from Citisoft. So thank you very much all, guys, for joining us.
Ryan Silva: Thanks for having us.
Dave Higgins: Thank you.
Marian Azer: Thank you.
Barnaby Nelson: So just to jump straight in, based on our research, one of the strongest stats that came out of the overall research was the fact that asset owners today really are using Excel predominantly to manage their asset allocations more than any other mechanisms.
So, Excel, not surprisingly, I guess, is especially prevalent at the lower ends of the AUM spectrum, and also amongst those who outsource their fund management, 44% of whom are using Excel today to manage their asset allocation. So Excel, in that context, even leads over and above master custodian reporting by some margin as the prevailing way to be able to take an integral view of portfolio performance across multiple activities, integrate it, and manage it.
What’s interesting as well is that less than a fifth of asset owners are using any kind of system or data layer to do the same activity in terms of asset allocations. And so this really seems to be a luxury potentially reserved for the big people and equally for those who are managing their own systems in-house. But then, I think as we’ll come onto, those who are managing investment activities in-house, are they using the right systems to be able to do this is going to be a point that we’ll touch on.
So maybe jumping straight in. Marian, Excel as the backbone for the asset owner today, does that reconcile with your knowledge? Is that kind of the standard operating model that you’re seeing?
Marian Azer: Yeah. Absolutely. You know, the use of spreadsheets is very prevalent. I would say the focus has been really on investment teams focusing on actually setting their asset allocation and their investment strategies, looking for investments as opposed to focusing on the execution and management of that. And I think, in turn, that there’s been a reliance on the use of Excel, and more broadly, spreadsheets to support that activity. So, yeah. Absolutely.
And I know we ran a survey, a global survey a couple of years ago, and again, we had very similar findings, and that was about 60% relied on spreadsheets in their investment process. And what’s interesting is that 82% of them actually said that their investment strategies were becoming a lot more complex. And therefore, as it became more complex, they were really struggling to actually meet the needs of effectively, I guess, transacting on their investment beliefs. So I think this is actually very common.
Barnaby Nelson: Absolutely. Yeah.
And what about from a Canadian perspective, Ryan? I mean, you’ve got a huge spectrum, if you like, of asset owners here in terms of size and scale. Do you see a similar challenge?
Ryan Silva: Yeah. Absolutely. I think for us in Canada, there’s sort of two buckets, I would say. The asset owners that are north of 25 billion, they tend to have more evolved technology infrastructures; there’s a little bit more thought given to how the middle office functions with some of the back-office functionality and the connections. And they’ll be relatively less reliant on Excel because they have to have scale.
But once you get into the smaller plans, and you know RBC services a significant portion of sub-billion Canadian DB plans, and they are absolutely largely dependent on Excel on the investment side, and then also into helping them function through some of the financial processes that they need. Because as the investment book gets into the accounting book, using Excel to facilitate those processes. So it’s definitely prevalent in the Canadian space as well.
Barnaby Nelson: Yeah. That’s interesting, to your point, about using Excel in a way to join up the gaps in a way and to smooth out flows. So I suppose there’s two ways of looking at it—one is as your kind of alternative to your overall system, and then the second is as the glue that holds everything together. I mean, presumably, Dave, from a systems perspective, you must see quite a large prevalence of both, I’m assuming?
Dave Higgins:Yeah. I’m thinking that the best way to answer this question, actually, is probably to put it in the context of two recent client projects, one ongoing, one recently finalized, for a rather large sovereign wealth. All asset allocation-type decisions, clearly Excel. Deep pockets, significant AUM, but maintaining Excel as the solution.
For a much smaller defined benefits organization looking to launch its own asset management business, indeed, they’ve actually explored the use of older management solutions in order to make their asset allocation decisions.
They’re supported—I’ll quickly add on—supported by Excel, but with an ultimate aspiration of leveraging one of the market-leading OMS solutions to make that asset allocation decision is interesting. I think that size and function and business profile is relatively agnostic with regards to the use of Excel. I suspect it’s more maturity of organization and intent and, indeed, probably importance.
I don’t know if Christine—just from a Citisoft perspective—that’s the European answer to that question—I don’t know if Christine has a different view with regards to North America.
Christine Knott: No, Dave. I agree. I think from a North American perspective, we see that Excel is prevalent no matter what. Even if they’ve got tools on the side of the desks, PMs, their support teams, they’re all using the application because it’s easy, it’s fast, it’s simple. And to Ryan’s point, a lot of the larger plans in Canada have significant tools to be able to support themselves.
But still, at the end of the day, you know, one of the things we always find when we go in is that it’s always about undoing the Excel and how much you can undo. And the reality is sometimes you can’t undo it all. And so, you have to live with that and know that that’s going to be the case in certain areas, that you’re never going to be able to take it away. But can you give them better support? Can you find what better ways for them to be able to get to the right answers without having to use that toolkit?
Barnaby Nelson: Yeah. Absolutely. And I think that point about it being the easy answer, I mean, it’s a really interesting one that it can—as you said, it can easily coexist alongside various other solutions, but ultimately, the fact that it is just the easy fallback option.
That comes through quite strongly in the report in terms of the fact that the smaller-scale guys—Ryan, you mentioned kind of sub-25 billion. I think our research is probably even smaller firms, probably anything up to about 5 or so billion. You’ve got a serious kind of no-frills model, if you like, where basically Excel is kind of prevalent as the tool, not necessarily as the glue to join everything together.
And in that space, as the AUM grows, obviously, those fixed costs of just running a few spreadsheets leads to great economies of scale. It’s like taking an EasyJet flight; it’s cheap and cheerful.
But ultimately, what’s interesting in our research is that, once you go above that threshold, you actually start to see, from a cost-efficiency perspective, that model, as you said, Marian, breaks pretty fast because, ultimately, in our research, you’re seeing the actual—the cost of the percentage of AUM actually start rising over and above about 5 billion. And so you’ve kind of got this whole question, the negative economies of scale or diseconomies of scale.
And ultimately, built into that, there’s a lot of the considerations you’re talking around about complexity, but also the cost of risk, the cost of operational frameworks, and so on and so forth.
And so, for me, there is a question of kind of, where are these thresholds. Dave, to your point, you’re seeing people actually starting to map out these thresholds today. Do you see—in the project you just mentioned, actually, how do people define kind of the threshold between Excel and non-Excel?
Marian Azer: It’s interesting. Definitely, in my experience, they start to look at it when they globalize, they get more complex; obviously, size; when they have a mixture of internally managed and externally managed portfolios, and they cannot get a total portfolio view that is accurate.
And the three things you really want to know if you are an asset owner is, is the core investment data that I’m using for asset allocation decisions secure, robust, accessible? Is it correct? When I do make a decision, will that actually be executed on? And can I transact it, monitor it, and measure it in terms of its performance? Was it a good decision? Or was it a bad decision? And how much risk did I add to the portfolio? And then you’ve got other elements of liquidity and also needing to react to market volatility.
And really, what we’re seeing is, as funds start to grapple with these things, and particularly in the case I’m thinking about, some of the larger funds in Australia in particular, globalize and set up investment teams across the globe, it is very difficult to have a pass-the-book total portfolio view for those asset allocators. So that’s when they really start thinking about, am I really delivering on the investment beliefs; and am I missing out on opportunity; and am I actually going to hit my return objectives or incur financial loss. So, as the numbers get bigger and the complexity gets bigger, I think we’re starting to see that search for something that they can operate.
And listen, I don’t want to demonize spreadsheets. They’re all good. We use them to a certain extent, so I understand the no-frills model. But I think as you get that size and complexity, there definitely is a need to think about people, process, technology.
Dave Higgins: Yeah. An observation and an important word here, I think, would be auditability as well. I think that what we discover is—because at our core where, as a management consultancy, we’re techs and we’re technology and mobile operations—we find ourselves working with many clients trying to resolve business challenges. And a significant part of those are making sure books and records are accurate and making sure that there’s an auditable track record of investment decisions made and all subsequent activity appropriately recorded. So quite thematically, in the initiatives that we do, we work on that.
And what’s quite interesting is that in the two examples that I think I gave, one was a nonregulated state-owned entity with an audit function that travelled from the Middle East, one assumes, several times per year to assist. They were more heavily Excel. And the UK FCA-regulated entity had recognized that for a variety of control reasons, it made more sense for them to try and move away from that and to build their auditability through using market-leading technology.
Now, time will tell whether or not the use of an older management system in the way that it’s being deployed is the most appropriate answer. One could look at that and think that that was quite an interesting decision to be made. But at least, I think, the point there being is that they recognized what they needed to do from an audit perspective, and that’s why they were doing it.
Barnaby Nelson: Yeah. Absolutely.
Dave Higgins: Just a different angle to Marian’s, I think.
Barnaby Nelson: Yeah. And I think this is the thing that comes through is when we’ve been debriefing, so much of this is, what’s wrong with Excel. As you said, Marian, at the end of the day, it works for a lot of people. And particularly in certain markets, in Africa, for example, the number of alternatives are actually reasonably thin, and which I want to come onto in a second.
But there’s also this question you raised about maturity of the organizational profile. And I just thought it’d be quite interesting to see that as a lever. Because ultimately, the more transparent ones are globalization, changing the portfolio, IFM versus EFM, auditability, everything we’ve talked about there. But how does the whole organizational kind of maturity, to use your words, and culture come into this? Ryan, do you have a view on that?
Ryan Silva: Yeah. It’s interesting that you bring that up because as I was sort of looking at this, the threshold, as you said, that some of them—catalysts to change, we’ve seen a few examples now. And there’s actually a human element, as you said, the cultural piece, where there’s an intersection between how investment committees are starting to think about the portfolio to deal with the challenges of the current global economy and all the things that are happening, and there is a migration of individuals within and different from one place to another.
So, two of our recent examples where we’ve worked with clients on change initiatives have been instigated by new folks. They’ve joined the organization, they’ve come from a larger place, and they are deeply offended by the fact that the organization is so reliant on Excel. And they cannot believe that some of the processes are so antiquated and not auditable. And they’re leading change.
Often when people change organizations, they have a mandate—their first 100 days, they want to do a bunch of things. And it can start with understanding the weak points that Excel presents. We find it particularly around the private assets. I mean, obviously, everybody knows those are largely based in Excel and how organizations have built it on that sort of infrastructure.
And then the reality of it is, there’s more technology being offered every day—newer, easier-to-implement technologies that are being implemented. So as people change organizations, the cultures are adjusting, people are retiring, and the old guard is leaving, the ones who built it on Excel. And some of the folks who are used to some of the new technologies want to implement it and make more streamlined processes.
Barnaby Nelson: Yeah. Absolutely. And ultimately, so you end up with—kind of in my mind, you’ve got three models. You’ve got, basically, all Excel. You’ve got—Christine, to your point—kind of using Excel to the side, to join things up. And then you’ve got the wonderful panacea of data lakes connecting up, specialist systems, and all of that kind of thing.
In terms of the journey, I suppose, from one to the other, there seems to be quite a theme that comes out of when people are trying to move away from Excel; this challenge of basically, first of all, everything we’ve talked about culturally—finding it, unpacking it, unpeeling it. But also, there seems to be a lot of anecdotal evidence to point to the fact that people move away from Excel and hop onto a portfolio management system that may or may not do much of what we’ve talked about at an asset allocation view.
And so one of the conversations we’ve had has kind of raised this whole idea of the post-Excel bounce back; basically, this increasing sense of despair that you can try and move away from Excel, but frankly, there’s not much better out there, so you end up coming straight back again.
Marian, does that resonate with you? I mean, that’s a Milestone view, so I’ll give—what do you think?
Marian Azer: Yeah. There is stuff out there, I think. And I think it’s just—there are a lot of fintechs and there are a plethora of choices, but I think it’s really difficult for asset owners to engage directly with the fintech community. We’re all out there. We’re innovating, we have innovated. And in fact, I know we have. So I think in many instances, there’s a bit of disbelief around what is actually out there.
And also too, they tend to be a very traditional segment, so they do gravitate to the proven, large end of town. And, Dave, you mentioned the OMSs of the world. But the OMSs are really there to survey a sector, direct investing, not necessarily pool investing or aggregate investing top down and back up, and really making sure those decisions are made effectively, and like I said, transacted, monitored, and you can see the risk.
And really, if they’re driving—and research tells us asset allocation drives more than 80% of their return, apart from the stock pickers, and I hate to disappoint some of the stock pickers, but that is the evidence out there. And so, they are really underserved and often find it hard to get the budget or the time to be able to engage with the right part of the community that can solve their problem.
And so often, they’re stitching a spreadsheet with an OMS or thinking that they need a data strategy and going on long data journeys. And data warehouses are fine and data lakes. But if you don’t know the problem that you’re solving for and you’re not focused on that, those aggregate investing needs of those asset owners, then I think you’ve missed a trick there.
Barnaby Nelson: Yeah. And, Christine, does that resonate in your example of the person with a little Excel just to the side, just tinkering away whilst they’ve got everything else going on?
Christine Knott: Yeah, it does. I think what Marian said is right. I think, though, the one thing that seems to be happening is people still, to your point, bounce back; they want to go double-check. So there’s a lack of faith in the tools that they’re taking. And so they move to a new tool, but then they bounce back, to your point, because they want to validate.
And I find that funny because in the end, there’s no validation on their Excel spreadsheets, right? So the tools that the fintechs are bringing to the table provide an ability to be able to validate the information, double-check the information. There’s controls in place. Yet there’s no control in Excel. There’s no control for anybody using the Excel. There’s nobody double-checking it, necessarily. And I think that’s one of the risks.
I myself have found walking into an organization, reviewing Excel spreadsheets and finding mathematical errors in return calculations. And we discover that as we’re going through the process with them, and all of a sudden, they recognize that they’ve been doing something wrong for a long period of time. It doesn’t happen very often, obviously, but it does happen.
So it is interesting because that need to go back and double-check, it’s almost a human nature. They’re a little bit concerned about taking advantage of the tools that are being put in front of them and they want to revalidate. So that seems to be the case. I mean, David, you’re probably going to agree with me.
Dave Higgins: Let me add to that. I think that when our clients select new systems for whatever— and in this case being, obviously, asset allocation—there’s an expectation that they can codify that solution in such a way that it reduces the need to use Excel and any other solution. So that whole codification expectation upfront, there’s generally a mismatch.
And I think that we’ve worked on many projects and continue to work on many projects where the aspiration is to decommission the use of Excel by codification into other—and it fails. And it’s an emotional bounce back to a common technology.
An Excel sheet can be passed between all the different business functions within an asset manager: the distribution, finance, even HR, operations, front office. It’s a common bit of technology. So everybody, they do. I haven’t actually heard the phrase bounce back before and before this exercise, but it’s one that we’re now—I’m now going to take forward because it’s absolutely true.
But I think as well as that, we should describe, it’s due to a lack of appropriate codification. So a fintech that can crack that and can provide all of the functionality that’s appropriate in this particular example and can eliminate the need for a bounce back will be successful.
Christine Knott: I think I just want to add to that, that that is absolutely right. In many instances, we’ve been appointed as a tech provider for asset allocation, and we are asked to essentially take a spreadsheet and put the spreadsheet into the platform rather than reimagine—
Dave Higgins: Yeah.
Christine Knott: —a new operating model that is productionized and automated, where they are validating, and they get really uncomfortable with that. And it’s a real shift in the way they manage their day-to-day activities. And so I think that’s the sort of leap that many of them need to take, particularly those investment operations teams that support those activities.
Dave Higgins: Yeah. Agree with that.
Barnaby Nelson: To that point, I mean, a lot of the things we’ve talked about are—I mean, half of them fall into the bucket of they’ve always been true in terms of there are inefficiencies, there’s lack of audit trail, all that kind of stuff. Half of them fall into the bucket of things that are becoming more and more urgent, so the globalization, the pressures towards private assets, the whole human consideration.
And, Ryan, do you find the tolerance of kind of the Excel-based operating model to be changing these days? Do you find—basically, is there a change in the level of urgency around replacement?
Ryan Silva: I think so. Where I see it is—we talked about the function of Excel in two buckets, one as either the system or one as the glue. I think to what everybody has said, it’ll be difficult to get away from Excel being a glue until fintechs become a lot more flexible.
So, when I speak to a lot of head of operations, essentially, they keep it because if you codify it, build it into the technology you’re putting in, the maintenance of it becomes—the more you customize these platforms that you implement, the more expensive it is to maintain, do the regression testing, to train everybody. And so, it almost becomes so bureaucratic that it doesn’t allow for flexibility. So it will remain as a glue.
However, as the private assets become a lot more complex, there are newer instruments. People realize that Excel hits its ceiling pretty fast. And when portfolio managers are inventing new things and saying, I need to do this differently, I need to do this in this particular market, the operations folks and the technology folks that are in charge of delivering it to their front office are running out of options. So they are looking actively at engaging with service providers and finding new solutions, particularly because there are better, way better tools available and are continuing to become more available.
Barnaby Nelson: Yeah. Absolutely. And just out of interest, Dave, you used the word codification; Ryan’s using the word flexibility. I kind of feel like the two of them, there’s tolerance and intolerance. Do you find that there’s a decreasing tolerance or increasing intolerance of kind of Excel, to your point?
Dave Higgins: Great question. I think that looking at where we are, and maybe it’s a function of the market and what’s going on in the world at the moment, is I think we find that moving away from—moving towards codified and moving towards [repeat], we’re moving towards standard is a direction of travel that many of our clients are going.
I think that in all of our client discussions, there is always a desire for maximum flexibility. But I think that if I were to sum, I think most of our clients at the moment are looking for—are prepared to limit the flexibility for the benefit of being more standard. And I think—I’m not sure I answered your question, Barnaby, particularly well, but that’s the best I’ve got.
Marian Azer: I might chime in on that. The big thing, definitely, for some of the large Australian superannuation funds and I’d say even in Asia, is simplification. Everyone I speak to is on a simplification journey, and that’s the buzzword.
So sort of similar to Dave, your sentiment of, let’s have something a bit more standard, they’ve realized that their operating model’s too complex and is on a series of spreadsheets, and they want to de-risk that essentially.
Dave Higgins: I would also comment that Excel isn’t the panacea for everything either. I mean, we have a very recent example of an outsourcing project where we’ve tested the boundaries of Excel. So the way that the migration between parties has to occur, the transfer of information involves, effectively, multiple worksheets in one workbook. It’s slightly bizarre, but we actually find ourselves in a situation where we’re trying to transfer data between parties, and it breaks the parameters of Excel. Did you know there was a finite number of worksheets you can have in a workbook? There definitely is.
So my point being is that even the flexibility that that offers—and this is data exchange between two market-leading vendors that—probably organizations that everybody would know—Excel hasn’t managed to solve that problem for us.
Barnaby Nelson: Yeah. And I think that kind of brings me onto the last question is, okay, so we’ve talked about Excel having many thresholds in many different directions. But I mean, Christine, you’ve been on several sides of the fence. I’m thinking of the alternatives around, I mean, what is the role of the master custodian; what are the roles of the other solutions out there.
How do you see that all the—we’ve talked about the problem and the challenges and limitations that get people to the table. What are they looking at in terms of options on the other side of the table now? We’ve mentioned fintechs, we’ve mentioned other things. What do you find people are turning to? Is it just basically trying to break Excel even more? Or contact the help desk to get more worksheets?
Christine Knott: I don’t know about contacting the help desk for worksheets. But, yeah, I have sat on a lot of the different sides of this equation, both on the fintech as well as the service provider, and obviously now on the consulting side.
But I think we’re never going to eliminate Excel; that’s a fact. So the question is, how do you complement it? How do you make it a useful tool? How do you ensure that our clients, as we’re working with them, that we’re helping them find the right solution set, we’re helping them find the right model, the right operating model to be able to be successful, but not taking away all their tools, not taking away all the things that they need to do? Because there’s always going to be something that’s customized or something that they want to do with the data themselves. But as long as there’s a consistency with regards to that information.
Ryan talked about the middle office, and a lot of his clients, they have middle-office solutions. And those middle-office solutions really are making sure that they’ve got the proper information. So as the allocator is making decisions or looking at the data, how do they ensure that that data is correct?
So, I think it’s finding that balance and ensuring that they’ve got the opportunity and they’ve got the controls and they’ve got the tools, like Marian discussed, and ensuring that they’ve got both the front, the middle, and the back-office tools, but then giving them also the opportunity to be able to take that information, look at that information, and deal with it themselves. That’s a reality, and I don’t think we can take that away.
So every software provider will tell you, they’ve got an export button, and that export button is to Excel, and that’s the reality. So it doesn’t matter what the fintech is, everybody’s got an export button. So we can’t take that away, but we do have to make sure that, as we’re working with the clients in all aspects, that we’re helping them understand where they can put the right controls in place, where they can be successful and better at what they do by having the right toolkit, but understanding that we’re never going to take it away. I don’t know if you guys agree.
Ryan Silva: Yep.
Dave Higgins: Yeah.
Barnaby Nelson: It’s interesting because one of the conversations with Geoff Hodge at Milestone was raising this whole question of Excel as a personal productivity tool. It’s not a systematic processing tool.
For me, where this all ends up is, ultimately, we seem to be saying it’s about getting Excel back into that box, that it is—you’ve got your core operating infrastructure, and that there is an ongoing discipline, not a one-off exercise, basically, to keep moving Excel back into its box as a personal tool that sits outside of the core operating model.
I don’t know if that resonates. But for me, what’s great is that we’ve talked through—I think I’ve got about 10 different triggers and thresholds around why we need to be kind of considering moving away from Excel as a platform. The fact that 66% of the market is trying to move away from Excel as their core model. And our survey shows that, basically, this has got a lot of attention. So for me, this lines up perfectly, the question of what next in terms of, ultimately, how this plugs in, how this meets other pressures that we haven’t talked about in terms of regulatory pressures and so on and so forth, and ultimately, how we build the business case for change. All of those are going to be coming up in the other podcasts.
So, I just wanted to do a quick round in terms of any other thoughts that you think that we’ve missed or that we haven’t covered off. I mean, spending a quarter of our time talking about Excel with asset owners feels about right in terms of the prevalence of the usage in the industry. But I don’t know if there’s any other points that we want to cover off?
Dave Higgins: Just one final one for me, Barnaby, if that’s okay. So the answer to the question is 255. That’s the maximum number of worksheets—255.
Barnaby Nelson: If there’s only one number you remember from this conversation, it’s 255. Excellent. There you go. Good.
Well, thank you so much for running through all that. It’s really, really fantastic. And I think, for me, as we said many times through this, what’s wrong with Excel? Potentially nothing, potentially lots depending on how you use it. And ultimately, really look forward to keeping on this conversation over the next few podcasts. Thank you.
Christine Knott: Thank you.
Dave Higgins: Thank you.
Marian Azer: Thank you.
Ryan Silva: Thanks, everyone.