Why institutional investors need to be shining a light on their unlisted assets

An 'Investment Book of Record' (IBOR) is defined as an accurate view of an entire portfolio's performance across all investments at any given time. Common sense would assume that institutional investors can value their clients' portfolios fairly. With listed securities, this is straightforward, as real-time access to constantly changing prices exists. 

Tightening the screws 

However, this becomes far more complex when considering unlisted assets, and it couldn't be more pertinent in the case of pension funds. For example, recent guidance from the Australian watchdog says…. ‘it will tighten the screws later this year on how superannuations value their mammoth unlisted asset portfolios' (ref: AFR). This sentiment is being echoed by regulatory bodies across the world and, at some time very soon, will impact the global institutional investment community. 

The new restrictions predominately stem from the fallout of COVID-19, which caused a market slump, reduced employer contributions, and prompted some governments to allow early access to retirement savings. Typically, listed assets were accurately reflected, as it was public knowledge that everything had taken a downturn. However, for unlisted assets such as venture capital, toll roads, airports, office towers and private equity, which in some cases are only valued annually, the amounts withdrawn may not have truly represented the value of the securities. This left remaining fund members with an unfairly reduced or overinflated balance, meaning anyone choosing to enter a fund could be doing so based on inaccurate valuations.

Complete transparency 

To combat this, institutional investors need better technology to provide complete transparency, enabling them to supply the regulators with validated quarterly declarations and the confidence that they are doing good business. Social media has created a world where there is no hiding place, and because of continuing global economic volatility, price fluctuations will continue to intensify. So, immediate action is required if you are not already shining a light on your valuation methodologies.

An IBOR means something different to whoever uses it, as the implementation needs to be context-specific. For example, what matters to an asset manager responsible for trading a portfolio of equities will typically differ from those of an asset owner or fund-of-funds manager who has delegated investment management responsibilities to several external sub-advisers. The concept of 'one size fits all' does not exist, meaning it is essential that asset owners must work with partners who understand their specific requirements. 

You can call it an IBOR, but in truth, what institutional investors actually need is a world-class investment data management solution. Once in place, users can apply modern, cloud-based technology which powers:

• flexible definition of position views and the extraction of position data
• projection and capturing of events which impact positions
• continual measurement and management of the quality of event and position data
• sourcing and maintenance of reference data which is exclusive to their assets.

Step into the light

In most cases, these solutions cannot be built cost-effectively or quickly enough in-house to satisfy the regulators because change is happening now. In addition, with retail markets steadily increasing their weightings of unlisted assets, it's only a matter of time before this becomes an industry-wide standard. 

And suppose regulatory pressure isn't pushing you hard enough? In that case, there is a world of opportunity out there to be had by leveraging artificial intelligence, machine learning and sentiment analysis, to name a few. But, if you don't have transparency across your complex portfolios including unlisted assets, then it's unlikely you will be able to exploit the power of these transformative tools. 

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