Career Paths

Having been involved in Investment Accounting for over 20 years I have had the opportunity to mentor a number of people in developing and progress their careers.

This is a concise resource I came across that outlines a potential career path in investment accounting; unfortunately there doesn’t seem to be an Australian equivalent. The starting position would be a role as an Investment Accountant, Fund Accountant or Fund Accounting Analyst (all role would be similar). The point I try and make clear when interviewing graduates is that Investment Accounting is not a career path to become a portfolio manager!

As a Investment Accountant you would usually be responsible for ensuring the Net Asset Value (NAV) of funds is calculated correctly. The implications of an incorrect NAV can be catastrophic and as a result these position have a large amount of responsibility attached.

In terms of education post graduate course such as Kaplan’s Graduate Diploma in Applied Finance would be recommended. The course covers such topics as financial markets, ethics, operational risk management, applied valuation, etc. Coupled with good on the job training this will develop a strong skills base. 

I came across this quote “If individuals are risk-neutral decision-makers who bear the full cost of investment in their own human capital, marginal costs of investment in formal education should be approximately equal to expected present value of marginal returns.”

This unfortunately doesn’t take into account the full picture. Don’t look at additional training in terms of the short term gain (promotion. Pay rise, etc). Those things will come in time, however you will gain networking contacts and your exposure across the industry.

Valuation Process – How valid is the value?

The recent volatility in markets, across days and intra-day, got me thinking about how accurate is a fund unit price in this market. The calculation of a unit price is an estimate at a point in time however it is imperative to be as accurate as possible given the circumstances.

Fundamental to the calculation of a unit price is pricing the investments within a portfolio. Whilst this may seem like a simple exercise it requires a number of decisions and like much of the unit price process the result of these individual decisions can result in significant differences in the final outcome.

Listed equities would seem to be a very straightforward investment to value; just take the price at the end of each day. Which price? Do you use Bid, Offer or Last price, and what time should the price be taken? Market convention is to use Bid for long positions and Offer for short positions. Typically procedures would be in place for situations where:

• No Bid price exists
• No Offer price exists
• Tolerance checks for price movements from the prior day (typically 3%)
• Zero price checks
• Stale price checks where the price has not moved for a number of days (usually 3 days).

Additionally at least two pricing vendors should be used and comparisons made.

My experience is that all reputable organisations would have these controls in place as a minimum however there are a number of other controls that should be considered to maintain accuracy.

Thinly traded stocks. These may not be identified as part of the stale price check. Typically these stocks our outside the ASX200 and price movements can be sporadic. As there is a limited market for the stock what is the accurate price? Where there is a significant holding it is very unlikely that all the holding could be sold at the current bid.

Significant gap between Bid and Offer. If the Bid is significantly lower than the Offer using the Bid may be under-valuing the holding. If the gap continues there may be a case for applying a higher price than the Bid.

Penny stocks. If a share has a price of 1c then a move to 2c would be a 100% increase. Would the price movement exception identify if there was an actual error?

Delisted stocks. No market exists and it is common to apply a zero price until there is some certainly on any value that can be obtained.

Unlisted stocks. These should be independently valued or priced at cost. Is the valuer actually independent or do they have a vested interest in an inflated value? Should more than one valuer be used when there could be significant differences in value?

Significant holdings. Where holdings in a particular company exceed 5% is there a case for using a price lower than the end of day Bid given that any significant on market sale is likely to be at a lower price.

Periods of high volatility. Where there are wide gyrations across the market consideration needs to be given on whether pricing should be suspended. The assumptions that unit trusts work on is that unit issued based on the end of day price allow the cash to be invested next day at a similar price. In recent weeks we have seen situations where the market has opened 2-3% up or down from the previous day’s close (following the lead of US markets). This volatility is inequitable as existing investors are impacted as new investors cash cannot be invested close to the prices they were given. A solution raised in the past has been to calculate prices intra-day however this has proven to be impracticable. The remaining solution is to consider suspending pricing where holdings volatility exceeds certain parameters.

What triggers are in place to suspend the fund given large inflows or outflows? In volatile markets it is very unlikely that significant portions of a fund could be liquidated equivalent to the prices used for unit pricing purposes. For large funds or where there are significant holding in a particular stock consideration should be given to what the realisable value would be.

It is important that the pricing sources, timings and methodologies be reviewed on a regular basis to confirm that the controls are adequate. If the price movement tolerance is set at 3% and the market is fluctuating more than that each day then all stocks would be out of tolerance; is this causing real issues to be hidden?

Best practice is to institute a Pricing Committee whose responsibility is to own the Security Pricing and Asset Valuation methodology. Membership should consist of Risk & Compliance, Finance and Investment Management staff. The intention is to create a group that challenges and tests the existing process looking for potential weaknesses. 

The Risks of Insourcing Investment Management

Recently there has been an increasing trend for large asset owners (pension funds, sovereign funds, etc) to insource the investment management functions. Whilst this has obvious cost benefits and can increase the perceived control of the functions there are a number of factors that Boards need to consider.

CalPERS (responsible for the California Public Employees' Retirement Scheme and the largest public pension fund in the US) recently set an external fee reduction target for the financial year, in light of the fact it spent more than $1 billion on external asset management fees in 2009-2010 and only a relatively modest $29.5 million on investment office personnel services including salaries.


About 62 per cent of CalPERS’ assets are managed inhouse, compared to about 33 per cent for its global peers according to a database put together by CEM. External asset management fees at CalPERS accounted for 90 per cent of the $1.2 billion in total investment office costs in 2009-2010. The other costs were personnel (3 per cent), portfolio management tools (2 per cent), consultants (2 per cent), legal and audit fees (1 per cent), appraisal fees (1 per cent), enterprise overhead (1 per cent)

Although the reduction in investment management fees in a laudable goal trustees need to consider the additional costs that will be incurred as a result of support these functions inhouse.

Potential for Underperformance
It would be uneconomical for Trustee to employ a full range of fund managers to cover all asset classes (including research team). Then a decision needs to be made on which sectors will be managed in-house and which will be outsourced.

Employing a team of fund managers also has its pitfalls. Leaving aside the problem of recruiting the managers with the right level of skills and experience, the pension fund is committed to using the skills of those managers it has recruited. Should market conditions dictate a change of strategy, a small investment team may not have the breadth of skills necessary to adapt to the new requirements. The fund then runs the danger of allowing the asset allocation to be dictated by the skill set of the fund managers it has hired.

Operational Costs
Operationally from insourcing, the pension fund becomes legally liable to meet an expanded range of increasingly complex reporting requirements, which adds to the overall management cost burden. The pension schemes that want to take control of the fund management process may also have to take on responsibility for middle and back-office functions.

Previously, these functions would have been managed by the fund manager, who to some degree acted as gatekeeper. In the wake of the financial crisis and the Madoff scandal, pension funds have wanted much closer control of these functions. Valuation, performance data, risk analysis and other services give the trustees a much more detailed picture of the state of their scheme's liabilities, but they come at a price.

Data Requirements
Many of the investment activities in which Pension fund trustee's are involved, such as the implementation of tactical asset allocations or the equitisation of cash balances, require visibility of the entire fund’s assets, often down to a security level. Typically service providers to investment managers have typically delivered portfolio data at an individual portfolio or product level with limited requirement to ‘roll up’ this data into consolidated structures to enable an overall view of portfolio positions. Trustee's insourcing investment management may need to consider the ability of their service providers to provide consolidated data or an investment in a data warehouse that can provide similar capabilities.
Risk reporting
A key incentive for insourcing investment management has been to provide improved risk controls. As part of the review of insourcing an analysis needs to be completed on the existing risk management systems and the reliance that is put on reporting from current investment managers. Risk management systems are typically expensive and complex to implement. Service provider offerings in this space have typically not provided the total fund perspective such as value-at-risk (VAR) and simulation testing.

Front Office Systems and Processes
Most investment managers have existing technology to support investment processes such as portfolio management and dealing. Where pension funds have made the decision to insource investment management they will often not have front office systems in place, and will need to select and implement these platforms. The expertise required to select and implement this system may not reside inhouse and could result in a protracted transition period.

The decision to insouce investment management needs careful consideration including an analysis of the operational and support costs.

The Right Selection Process Improves Performance

Working with a organisation recently it was oserved that over the past two years staff turnover rates were well above the industry average. This was leading to increased recruiting, selection and training costs. In addition the high turnover rate was disrupting the efficient running of the organisation with knowledgeable and experienced staff leaving and replacements being sought.

In exit interviews the main reasons stated for leaving was an inability to “fit in” with the company culture and that the compensation did not compare to market rates. The selection process was being reviewed to determine if it is contributing to the turnover.

Analysis
In determining the cause of the high turnover all aspects of the human resources management (HRM) were reviewed uncovering that the root cause was the selection processes. The ineffective selection process resulted in staff being hired that did not fit culturally with the organisation. In addition to the high turnover the lack of cultural fit was potentially causing absenteeism and low productivity although these had yet to be researched. Pfeffer (1998) has suggested that recruiting people that have a cultural fit with the organisation leads to increased profits.

Issues with the selection process were a narrow search for candidates, no screening for cultural fit, no clarity on critical behaviours and attitudes, conducting only one interview and not assessing the results of the selection process. Analysing each of these issues in turn provided support for the premise that hiring for cultural fit is key to reducing high turnover.

Figure 1: Issues with the selection process

Sourcing candidates from a wider search would increase the chances finding the candidate with the best fit. Organisation such as Southwest Airlines and Subaru source large numbers of applications and interview a significant proportion in order to have the highest probability of sourcing the right candidate (Pfeffer 1998).
The reason for leaving of “not fitting in” highlighted that the values and assumptions of the candidates did not align with those of the organisation. To ensure better fit it was recommended that compatible values should be identified in the selection process. Personality and cultural traits should be screened for as these cannot be taught however skills can be taught. Candidates who are sociable and cooperative would support the high level of teamwork required. It was proposed that when people work in organisations that have a culture that fits with their values, they are more likely to be satisfied and productive.

Due to the tight labour market there is a tendency to settle for the first applicant with the right skills however this approach is unlikely to identify the values and behaviours that will provide a suitable fit with the corporate values. Conducting only one interview will not identify the teamwork and presentation skills required in all roles. Companies that value their staff require candidates to proceed through several interviews and a rigorous selection procedure. Not gathering feedback on the selection process leads to a repetition of the problem. A number of months after the selection it should be possible to assess the quality of the selection process by reviewing each component.

Although the organisation had a policy of paying market rates this does not appears to be attracting the right candidates. We argued that if organisational want to attract the highest performers it needs to have compensation that is substantially above market rates.

Improvement Planning
Selecting candidates based on cultural fit rather than the first applicant with the right skills will ensure lower turnover, lower absenteeism and improved productivity. The exit interviews support this with staff leaving because they don’t fit in. For the model to be effective all aspects of the model must be integrated simultaneously in order to derive business value. Although these could potentially improve the selection process they are outside the scope of this improvement plan and were analysed at a later date.
In recommending improvements we recommended a model for hiring the right people that included having a large number of applicants, screening for cultural fit and attitude, being clear about the most critical skills and behaviours, using several rounds of screening and assessing the process. A more structured process would be supported by the level of formalisation in the organisation.

The number of sources for candidates can be increased by utilising sources such as internal searches, advertisements, employee referrals, employment agencies, and web-based advertising. Although web-based advertising has a wide reach it generates many unqualified candidates.

As a example companies like Southwest Airlines prefer to hire without previous industry experience and select based on attitude alone to achieve cultural fit. This approach did not fit with the organisation as many of the roles are highly technical requiring five to ten years industry experience. A more appropriate approach would be to select for a combination of experience and attitude.

A more lengthy selection process would ensure that those who are hired have been carefully scrutinised and are committed to the role. The selection process should involve at least three interviews with the candidate’s supervisor, manager and HR. Other selection devices could include application forms, written tests, performance-simulation tests and background investigations. This will increase the resources expended on selection however given the costs of replacement this is justified.

In order to improve the selection process all components would be validated against the subsequent performance of the people selected. The HR department would manage this feedback process with the process being refined and developed based on these reviews.

Figure 2: New selection process

Selecting candidates based on their cultural fit to the organisation improves their ability to work within the team and improves performance. With such critical functions it is important to have the "right" team in place and time spent recruiting will improve performance in the long term.

Applying a Process Methodology to the Production of Unit Prices

Applying a process mindset to the the production and delivery of unit prices can provide a insights into potential improvements. Accuracy and timely delivery are critical to the process with substantial penalties for non-conformance thereby requiring strong process controls.

Fig 1: The Unit Pricing Process in an outsourced environment
Customers define quality as quality of design and conformance quality. In regard to the unit price delivery quality of design relates first to the calculation of the unit price. There are many inputs into the calculation of the unit price and its calculation is governed by standards issued by Financial Services Council (FSC) and subject to review by ASIC. Achieving quality of design is the ability to meet all these standards. The second aspect of quality of design relates to timely delivery as defined by the customer. Conformance quality is associated with being able to deliver to these parameters each day.

The Joiner triangle (Joiner, 1994) provides a model to review how quality is delivered to customers and emphasises that for quality to be delivered it must be measured and that quality is achieved through an empowered workforce. The delivery of quality is essential in regard to the calculation and delivery of unit prices due to the high level of regulation and the high costs incurred for errors. There have been many examples of large compensation payouts for unit pricing errors with the largest being in 2003 when National Australia Bank recompensing customers $67 million for errors that had continued for the past ten years (SMH, 2003).

Figure 2: The Joiner triangle (Joiner, 1994)

In delivering quality the external failure costs are the most visual and the most difficult to estimate. An error may exist for an extensive period before being discovered. Many other costs of quality are less obvious but substantial and include prevention, monitoring and internal failure costs. Although many product issuers outsource the unit pricing process reviews and reconciliations are still required due to the high level of risk in the process. Designing the process, employing and training staff assists in preventing errors however there is a large costs incurred.

Although errors in the process are the most visible aspect they are relatively rare. The area that requires more attention is the other aspect of quality that customers value; the actual delivery of the unit prices to customers each day. The review process must be accurate and meet the requirement for zero errors but it must also meet customer’s requirements for on time delivery.

Measures
Achieving high quality in the unit pricing process requires objective facts about processes and outcomes. The two types of measurement that can be used are outcomes and process measures. Outcome measures are obtained direct from customers regarding their satisfaction. Process measures look at the internal processes their impact on customer satisfaction. Data should be collected on the level of customer expectations, the relative importance of those expectations and the customers’ perceptions of comparisons with competitors.

Table 1 outlines for the unit price process the approach that should be taken to collect the data, the relevant measures.

Table 1: Unit price process measures (Adapted from Berry & Parasuraman, 1997)

1(c) Common & Special Cause Variation
Common causes are those factors and variables that give rise to normal variation, whereas special causes lead to un-normal or unusual variation. Common causes often encompass many small random variations that individually are difficult to isolate and control, but together result in an expected and often predictable range of variation. Although there are many measures that can be chosen for the unit price process delivery time is the most visible and has a high impact on customers if the specification is not met.

Common cause variation is intrinsic to the process and applying this to the delivery time for unit prices this would cover items such as staff training, staff sick leave, staff annual leave, reconciliation differences and delivery delays. As part of the normal process staff resources must be managed. This applies to both the outsource provider and to Schroders. In the normal course of business staff will be on sick or annual leave which can result in the process taking longer. Additionally new staff may need to be trained on the process which again will result in a later delivery. In managing staff resources most of these circumstances are pre-planned and additional resources can be obtained to reduce the variance. Over a certain period there will be a reasonable number of reconciliation differences as a result of the large number of calculations required. Investigation and resolution of these reconciliation differences have the potential to delay the delivery.

Special cause variation arises from specific conditions that occur singularly. Applying this to the delivery time for unit prices this would cover items such as the introduction of new funds, changes in legislation or rules, email server failure, system failure or new customers. As the delivery of the inputs from the outsource provider and the delivery of the final unit prices to customers is by email any failure or delay in email servers will result in late delivery. Changes in legislation of calculation methodology will require changes in processes and additional staff training which initially could lead to later deliveries. Apart for the legislative changes these variations are un-planned and must be dealt with at the time they occur.

To develop conformance quality it is first necessary to eliminate the special causes of variation and develop a stable process. The next step is to then reduce the common cause variation.

Control Chart
Using the delivery time for unit prices to customers an X-chart can be used to track the actual delivery times.
In setting up the control chart the following steps should be followed:

1. Estimate the mean of the data.
2. Calculate the standard deviation of the data.
3. Calculate the upper control limit
4. Calculate the lower control limit

Example of the Control Chart for release of unit price data

Analysis

Using the data above the unit price delivery appears to be a stable process with all data points within the upper and lower control limits. The variations in delivery time appears to be the result of common cause variation however this does not specify how well the process meets customer requirements. In this example customers required that the unit price email be delivered before 2pm and the data collected showed that in many instances this parameter was not being met. Customers do not define a lower specification as they are happy to receive the data earlier, if possible. The lower specification has been set at 11am as this is the earliest the input data could be delivered.

The capability ratio measures the expected number of times the delivery will be outside specifications. This is calculated as:
Cp = (Upper specification – Lower specification)/6σ

Cp = (14:00 – 11:00)/(6 * 0.8)

Cp = 0.60

This would indicate that the variation is less than customers expect however this is only the case if the mean lies close to the centre point of the specification range. For this example the unit pricing process this is not the case. The process capability index, Cpk , defines which of the upper or lower customer specification will likely be breached.

Cpk = min( Upper specification - Χ, Χ - Lower specification)/3σ, 3σ

= min ((14.00 – 13.70)/(3 * 0.8)), ((13.70 – 11.70)/(3 * 0.8))

= 0.10

As the graph shows and this calculation verifies the lower specification will be rarely breached however the upper specification has a high probability of being breached. In this sample it has been breached 18 out of 40 times.

In order to identify the reason the customer specification are not being met a cause and effect diagram can be used.

Cause and effect diagram of the unit price process (Adapted from Slack et al, 1995)

There are three steps within the unit price delivery process being the delivery of inputs from the outsource provider, checking and review by the Product Issuer and then delivery to customers of the final unit price. Further analysis of each step through the use of control charts can identify where the largest variances occur. Reducing these variances is the key to improving the final delivery to the customer. Once a variance is indtified the first step is to remove the special cause variance. The aim is to reduce the processing time in order to meet the final client specifications; therefore the first step is to set some specification for this process (eg mean time for the process should be 30 minutes with and upper limit of 40 minutes and lower limit of 20 minutes). Given these parameters the analysis then needs to concentrate on those days when these parameters were exceeded. Clearly if the process takes longer than 40 minutes there is an issue however taking less time could indicate a lack of integrity in the review process. Reviewing and investigating each observation provides insights into correction.

Working with the outsource provider on their processes presents an opportunity to reduce both special and common cause variance. Rather than treating the processes in each organisation as separate viewing it as the one process would allow efficiencies to be identified. Some of the reviews and checks that Product Issuers complete could be moved to the outsource provider so that when the inputs are delivered minimal processing is required. Although Product issuer needs to maintain responsibility it can achieve this be conducting due diligence on the Service provider processes. This would remove duplication and improve delivery times to the customer.

The process of reducing common cause variation is ongoing and iterative. Reducing variation will in turn reduce the upper and lower control limits resulting in a higher quality and reliable product to be produced.

The unit price process has critical parameters for accuracy and timeliness from the customer’s perspective. Although the requirements for accuracy are being achieved it is essential that deliveries are made within client specifications. Designing a process that delivers quality at a reasonable cost is the goal of Total Quality Management. Designing a quality process is not just contained to within the Product Issuer but requires the process to be treated as a continuous process between the Service provider and the Product Issuer.

Time to Market

"Time to market" describes delays in investing applications or selling assets to fund redemptions. Probably the easiest way to illustrate this concept is by way of an example where a fund invests into an external fund; this situation would be familiar to anyone operating a platform. In this example, say due to manual processes, it takes 4 days for the funds to be invested in the underlying fund:

 

Day 0, NAV 1,000, Units on Issue 1,000, Unit Price 1.00

Day 5, NAV 1,060, Units on Issue 1,000, Unit Price 1.06

Underlying Fund
Day 0, NAV 1,000, Units on Issue 1,000, Unit Price 1.00

Day 5, NAV 1,060, Units on Issue 1,000, Unit Price 1.06

 

In this example we have a fund with issued units of 1,000 and a unit price that has steadily increased from inception at $1.00 to Day 5 at $1.06. The fund holds all the assets of the underlying fund; and the price has moved similarly.

 

Now continuing with the example say on Day 5 an investor lodged an application for $1,000. In this example it would take 4 days, Day 9, before those funds would be unitised in the underlying fund. The funds are unitised in the fund at $1.06 giving 943 units. The asset, the units in the underlying fund, are valued at the last available price, being $1.06. It is not until Day 10 that the funds are unitised and the investment confirmation is received detailing the actual unit received. At that time the valuation must be adjusted.

 

Day 5, NAV 1,060, Units on issue 1,000, Unit price 1.06

Day 6, NAV 2,060, Units on issue 1,943, Unit price, 1.06
Day 10, NAV 2,100, Units on issue 1,943, Unit price 1.08

Underlying Fund
Day 5, NAV 1,060, Units on issue 1,000, Unit price 1.06

Day 6, NAV 1,060, Units on issue 1,000, Unit price, 1.06
Day 10, NAV 2,100, Units on issue 1,909, Unit price 1.10

 

As a result of the mis-match the existing unitholders have suffered a loss; and are therefore have not been treated equally.

 

To correct the situation the operator would need to compensate the fund to the tune of $37.74 - 1,943 units * (1.10 – 1.08).

Time to market issues exist because we operate in the real world. There are many fund structures that have 7 or more interfunding layers. These layers can be external (as in the case of Platforms) or internal or a combination of both. Depending on the systems being used each layer can take a day for the funds to flow through one layer of the structure. So 7 levels is 7 days for the funds to be actually invested.

Although 99% of the market is using forward pricing this does come with its issues. Just looking at a standard flow of funds:

 

• Daily cut-off for applications/redemptions: 3pm
• Processing completed: by 7pm
• Unit price calculated for prior day: 10am
• Cash availability to fund manager: 11am

However the units were issued based on the valuation for the prior day. The cash wasn’t invested until the next day, at best. Some fund managers have tried to avoid this by taking cash flow estimates at the end of the day and then taking futures or physical positions to cover any large flows overnight.

 

In most situations time to market will not be an issue as the funds flow will be a small proportion of the fund size however exceptions always exist (eg GFC).

 

The regulations provide little guidance on time to market issues. Section 10.8 of Standard 8 allows units to be issued prior to funds being received; but this really doesn’t help. You can use the standard 30 basis points and $20 compensation rules however most of us are now using much tighter tolerances.

 

There are now automated solutions for some of these issues where some unit registry systems allow cash to be flowed through the interfunding structure on the same day. However this solution only works for trusts within the same operator or using the same systems which still leave issues where one trust is investing in an external trust.

Unfortunately I don’t have any solution except to say:

• Be aware of the level of interfunding within your products and the associated time to market issues
• Of course the issue is impacted by size of cash flow in relation to fund size so look at having some safety checks within the process to monitor the cash flows.
• And then have a plan on what to do if the impact exceeds your thresholds.  

Is the focus on fund financial statements warranted?

All managed investment schemes are required to prepare annual financial statements in accordance with Australian Accounting Standards (AASBs) as outlined in the Corporations Act

 

Function of Financial Statements

 

To meet the SAC 2 objective of providing information useful for decision making and discharging accountability, financial reports should disclose information relevant to the assessment of performance, financial position, and financing and investing activities, including information about compliance (SAC 2, para.45). - Gallery, Gerry and Gallery, Natalie, 2003

 

But are investment fund financial statements really used for this purpose? In my over 20 years preparing fund financial statements I have had only one request for a copy of a financial statement. So why is so much time, effort and expense put into producing a report that is not useful?

 

There are a number of reasons for the lack of investor interest in a fund’s financial statements as compared to listed company financial statements.

 

Decision Making: As an investor in a managed investment scheme the financial statement provides little information that will influence the decision to invest or divest. Financial statements are required by the Corporations Act s319 to be completed and lodged by 30 September and in most case given the complexity of preparation and arranging board meeting for signing most funds will complete the reports within 1 to 2 weeks prior to 30 September. With an Australian sharemarket that has shown high volatility in line with the rest of the world in the past few years information that is reported 3 months after the event is virtually useless.

 

In deciding whether to invest in a fund an investor will review the funds PDS and financial advisors are required by law to provide a copy to all investors when providing advice. The PDS provides details of the parameters that the investments will be managed within along with historic performance. In the Financial Services Guide it states that if an Adviser makes a recommendation to about a particular financial product they must provide a copy of the PDS prepared by the product provider. This will contain information that will assist them in making an informed decision about that product. The PDS includes information about the costs and details of other fees and charges which may apply, including commission payments to financial advisers. The FSG does not require a copy of the funds financial statement o be provided to the investor

 

Accountability: The accountability of the fund trustee’s differs from that of a company’s board in that a managed fund is supervised under much stricter parameters that the management of a company. The PDS sets out how a fund will be managed (for example, an Australian Share fund may invest between 80% and 100% in Australian Equities with the remainder in cash). Therefore the fund’s trustees discharge their accountability obligations to the unitholders in ensuring the fund is managed within these parameters. All investment managers have pre and post trade compliance systems in place to ensure these rules are followed with strict internal penalties for breaches.

 

Performance: An investor will assess a fund’s investment performance from league tables (Morningstar, Investsmart, etc) not from a financial statement.

 

Compliance: Managed investment schemes must lodge an audit report of their compliance plan, under s601HG of the Corporations Act by 30 September each year which will clearly highlight any compliance breaches. Again the financial statement is not the vehicle for obtaining this information.

 

Cost

 

The average fund financial statement costs $5,000 per year to produce (based on an average of outsource provider rate cards). When coupled with the cost of the audit which has been estimated at $39,000 per year this is a total of $44,000 per year to produce a statement of no value. When extrapolated across all managed schemes in Australia this becomes a lot of effort for little return.

 

Process

 

The significant level of scrutiny by regulators and increased complexity of regulations has resulted in a challenging environment for those responsible for producing mutual fund shareholder reports within the 60 day regulatory reporting requirement. With an average processing cost of $5,000 per year combined with the cyclical nature of report production means that investment managers need to optimise processing efficiency and shrink the delivery times inherent within the reporting cycle.

 

Given the lack of investor reliance on financial statements their production becomes a regulatory reporting exercise similarly to producing a tax returns or a BAS return. And no investment manager would strive to be the best in producing these returns so why would they want to be the best at producing financial statements. This requires a change in approach from the Board down to ensure the right focus is placed on this activity. The focus should be on value adding activities that improve shareholder returns; preparing financial statements is a risk minimisation exercise to avoid regulatory penalties.

So for a non-value add process that is expensive and time critical it is important to consistently apply some or all of the following practices:

• Educate the Board and key stakeholders on the differences between fund financial statements and company financial statements
• Create the first draft early and is accurate and complete when distributed.
• Schedule pre-period reviews to get a head-start on resolving issues such as those that often accompany the purchase of new securities or changes to regulations.
• Complete and review static components of the report prior to period-end.
• Maintain a library of standard language.
• Have well defined reviewers’ roles and responsibilities for each level of review
• Utilise a financial reporting application that has built-in automated proofs.
• Utilise analytical tools for those reviews that cannot be built into the system.
• Develop and adhere to a materiality policy, particularly when considering making changes late in the reporting cycle.

Summary

 

The preparation of fund financial statements is an expensive and time critical task that when assessed against the users requirements it is a non-value add function. As a result the importance of this function should be de-emphasised and attention given to process improvement opportunities.

Why Unit Prices Should be Audited

Should unit prices be the subject of an external audit opinion? In the present environment only annual financial statements and sometimes distributions are audited. As an investor I’m interested in two things:

• am I paying the right amount for my units, and
• is the fund manager doing what he says he promised to do in the PDS.

For most funds the focus is on the audit of financial statements as required by the Corporations Act. This audit though focuses on a point in time and gives no insight into the accuracy of unit prices over the other 364 days of the year. Financial statements include a reconciliations between the market value shown in the financial statements and the market value (or cost) used for unit pricing. Most practitioners avoid the external auditors looking at the unit prices by putting this reconciliation in the Directors’ report. My belief is that this should be included in the notes to the accounts which would then require review by the external auditors.

If there is confidence that unit prices are accurate then the industry should welcome this review of the process. If it is accepted that the audit is required then the difficulty becomes what would the extent of that audit be and are the external auditors the best people to provide this opinion.

Any audit opinion over the accuracy of unit prices would look at the RE’s compliance with IFSA standards, APRA/ASIC Guide, market practice, internal policies and procedures, etc. The opinion would cover how closely aligned the RE’s unit pricing policies are to the IFSA standards, ARPA/ASIC guide and market practice and the application of these policies. In summary the auditors would be asked to opine on whether the RE has materially maintained unitholder equity through its calculation and application of the unit price over the prior year.

 

Looking at the current structure of audit reviews there are audit opinions over: 

• Financial statements – covering compliance with accounting standards, specifically that all income and expenses have been recorded correctly and that assets are valued correctly as at 30 June
• AGS1042 Controls report – over internal controls, policies and procedures
• AFSL Licence audits
• RMP and RMS audits
• Compliance plans, Derivative Risk Statements audits
• And for investment managers owned by an overseas company there are a raft of other audits

However none of these audits specifically targets unit pricing; which is the area where there has been the largest losses and everyone agrees has the highest risk. Although I’m sure that this is music to the ears of any external auditors investors need to have adequate protections around the calculation of unit prices. When a unit pricing error occurs referring to the audited annual financial statement will not be any comfort.

 

The second test that investors are interested in is whether the fund manager is investing the funds as outlined in the PDS. The existing Compliance plan audits provide this assurance however the investor never gets to see these audit results. Including the audit opinion on the unit price and the compliance plan in the financial statements would provide investors with more confidence that they are paying the right price and that their money is being managed as promised.

Principal-Agent Problems in Outsourcing Middle and Back Office Functions

All Investment Management firms see their key competitive purpose being to produce investment returns. The outsourcing of custody and investment administration functions to global providers has been seen as a positive step for both parties as administration tasks are viewed by the business as non-core and service providers are keen to exploit economies of scale.


The principal agent relationship between outsourcer and provider is outlined in the contract. The contract details the duties, authorities and liabilities of each party. In a lift out arrangement there may be an agreement not to re-enter the market and to enter into a long term contract to allow recovery of transition costs.

Generally with contracts over long periods and in all relationship issues I have been exposed to the cause has been a lack of attention to solving the principal agent problems of differing risk profiles, moral hazard and imperfect commitment when establishing the relationship. At its most severe this can resulted in attempts to break the contract and terminate the relationship with the outsource provider.

Differing risk profiles
Investors hand over their assets to an investment manager to manage. The investment manager then provides these assets to the service provider under the custody contract as its agent. As a result of its obligation to protect the interests of its unitholders as outlined in its Responsible Entity license the investment manager is risk-averse. This licence commonly imposes additional conditions upon the investment manager to monitor and supervise the service provider to ensure the assets are protected; essentially ensuring that the responsibility for the unitholders assets remains with the investment manager. The service provider as the custodian is risk-neutral as its obligation to protect the assets only exists under the custody contract. The custody contract will generally specify that the custodian will use reasonable care and diligence in carrying out these services and will at all times act in good faith, or similar wording. The differing risk profiles manifests in ongoing issues over the level of risk management that the investment manager requires of the service provider. The investment manager will promote a strong risk management culture as a result of its fiduciary responsibilities and as a source of difference in the market. This level of risk management is normally not reflected by the service provider and not addressed in the contract. Consequently, risks will not be managed to the level required by the investment manager.

Opportunism – Moral Hazard
Moral hazard results from the fact that it is impossible for a principal to observe the behaviour of the agent, without incurring prohibitive costs. Usually the investment manager cannot directly observe the level of effort deployed by the service provider it cannot easily tell whether a problem is due to negligence on the part of the service provider or due to an unforseen event. As the service provider knows the investment manager cannot tell, the service provider can always blame poor performance on circumstances beyond its control. A basic assumption of agency theory is that opportunism is an inherent characteristic of such a relationship. In order to gain more control over what the service provider does and remove the potential for moral hazard over the length contract generally the level of monitoring is increased; in some case removing some of the benefits of outsourcing initially proposed. Monitoring can extend to include annual surveillance visits, quarterly due diligence reviews, monthly liaison and steering committee meetings where SLA and KPI’s are measured and ongoing daily monitoring. The costs of this surveillance are not insignificant and despite the amount of effort expended by both principal and agent a lack of confidence in the service provider can still exist due to an absence of clearly documented expectations regarding the level of monitoring necessary.

Agency theory contends that the principal or agent will deviate from the behaviour prescribed by the contract whenever they benefit by doing so. The service provider will not always adopt opportunistic behaviour as moral codes, social norms, the risk of prosecution and the possible detrimental effects on reputation will tend to limit the extent of opportunism. The legal constraints on the investment manager do not allow it to rely on these limiting factors to ensure delivery of the service.

Issues can come to a head where Boards become involved and direct additional reviews of the service provider. Commonly outsourcing contracts include the ability of the outsourcer to audit the service provider however putting this into practice tends to be very difficult given the global operation. The concentration needs to be on resolving the differing views between the principal (investment manager) who requires full transparency and the agent (service provider) who believe their internal controls are sufficient and that they do not need to be monitored.

The industry regulators (ASIC and APRA) impose additional responsibilities on investment managers in outsourcing some of its functions (Unit Pricing Guide, 2005). The guide requires the principal to retain sufficient knowledge of the outsourced functions to effectively monitor both the performance of the service provider and the end-to-end performance of the unit pricing function, address any deficiencies in performance, and ensure continued compliance with all regulatory requirements. In order to satisfy these requirements the investment manager must have a monitoring program in place for the service provider.

The difficulty is to determine the level of monitoring required by the investment manager and ensure this is implemented by the service provider. The regulatory environment clearly states that in an outsource relationship the risk of non-performance does not transfer to the service provider (Corporations Act, 2001). The risk of non-compliance with the regulations is the cancellation of the investment manager’s financial services license and as a result a loss of all its revenue. Consequently the investment manager will continue to raise the level of monitoring of the service provider.

A solution is to fundamentally change the nature of the contractual relationship with the service provider. The investment manager’s objective is to have a provider relationship that is an extension of the business delivering the service through a collaborative working relationship that is performance based and has the flexibility to adapt to changing business strategies through creative and innovative solutions. A number of relationship principles should be identified with the intention to ensure these outcomes are embedded in the relationship through the contract or the relationship structure. This is intended to overcome the coordination and motivation issues inherent in the relationship.

Shirking
There is the additional problem of the monitoring of the investment manager and service provider employees to ensure they are acting properly (that is that they are carrying out their role subject to contractual terms which includes compliance with the investment manager’s policies and procedures). As direct monitoring of both the investment manager and service provider employees is not always possible, shirking may also be prevented by placing some of the remuneration of both at risk. For investment manager employees, their bonus is dependent on them not only achieving specified goals, but also on them behaving in accordance with the investment manager’s values and in accordance with their contract (which includes policies and procedures). Performance against these goals and values should be assessed at least twice a year. This ensures (in theory) that employees don’t simply try to achieve their goals by whatever means possible. Service provider employees should have a similar remuneration structure. Some authors argue that other incentives besides monetary reward can be more effective in assuring the provision of effort (Deci, 1975).

Investment managers in the main rely on their reputation in order to gain further business. This reputation acts as a “signal” about the quality of the investment manager’s service. To protect its reputation and guard against employees engaging in opportunism, the investment manager should have a self-monitoring system where employees must complete reports each month reporting any risk issues (including breaches of policies and procedures) and each quarter, Risk & Compliance would conducts reviews of each business unit to test compliance. These reports and reviews effectively monitor employee behaviour. The service provider ideally would have a similar process in place using an in-house system to measure client-driven performance standards.

Service providers are normally renumerated based on a fee for service with no incentive for on time delivery and no penalties for non-delivery in the contract. As in the traditional sharecropper example, the outsourcer is always concerned that the service provider may engage in shirking because even if it makes no effort to deliver the service it will still receive the fee. In order to avoid shirking and provide the motivation to deliver the contract needs to include a risk and reward framework that is underpinned by a robust performance management system with KPI’s to measure performance.

Opportunism: imperfect commitment
Imperfect commitment is the imperfect capacity of both the principal and agent to commit themselves. To ensure outsourcer and service provider will not be tempted to renege on their promises and commitments a service level agreement (SLA) should be in place detailing all services which is monitored daily. The development and monitoring of the SLA is clearly a cost of the principal agent relationship.

Sometimes during outsource negotiations the investment manager will attempt to construct a contract where revenue is based on a fee for service and the contract does not allow a fee increase above a market level. Therefore to increase profits the service provider will seek to minimise its costs. This could result in the service provider shirking through non delivery or under delivery through poor quality. The investment manager, on the other hand, is seeking to continually improve its business. These divergent interests need to be resolved in the contract by outlining the expectations and providing incentives for each party. In this context where many of the product/service attributes are unobservable and when quality is important an incentive contact that is based on output may be inappropriate. The contract needs to provide incentives for both delivery and for quality along with a method of ensuring continual improvement is a goal for both parties.

Conclusion
Many long term outsourcing contracts degenerate over time and result in alternate providers being appointed at the end of the contract. However utilising agency theory to analyse the relationship highlights that fact that it was unlikely to succeed due to the issues of differing risk profiles and post contractual opportunism not being adequately dealt with at the commencement of the contract. The regulatory environment and investment manager’s risk averse nature results in the requirement to monitor an outsource provider closely. The contract needs to clearly outline the monitoring required and provide the motivation for both the investment manager and service provider to commit the necessary level of resources.

References
Corporations Act 2001, s601FB and 769B
Shirking and Motivations in Firms: Survey Evidence on Worker Attitudes, L. Minkler, University of Connecticut, September 2002
Unit Pricing Guide to Good Practice, Joint APRA and ASIC Guide, November 2005

Backdating

In my role as a consultant advising fund managers on areas such as strategy formulation, operational efficiency and effectiveness, I've come across a number of situations where clients have attempted to do the "right" thing but in the process have caused unintended consequences

In a recent assignment I was asked to review a clients backdating policy looking at market best practice. Interestingly we found that there was little standardisation in the industry:

• Backdating standards vary between organisations dealing with managed funds vs superannuation products.
• Performance standards vary from T to T+10 business days.
• Varying levels of materiality are applied as a hurdle before applying compensation. Many organisation use a combination of basis points and dollar materiality.
• Compensation is generally made for the full backdating exposure (from effective date to processing date).
• Generally where transactions are processed outside performance standards compensation is made on a transaction basis with no netting applied.

Whilst I don't have all the answers I'd like to talk about some of the reasons for differences in approaches and how as practitioners we can deal with this issue. 

What is Backdating

So let’s start with backdating. Backdating is applying a previously calculated unit price to a current transaction. Probably the easiest way to illustrate is by way of an example:

 

                          Day 0                   Day 1                           Day 5

 NAV                  1,000                   1,010                           1,060

 Units on Issue     1,000                  1,000                            1,000

 Unit Price           1.00                    1.01                               1.06

 

In this example we have a fund with issued units of 1,000 and a unit price that has steadily increased from inception at $1.00 to Day 5 at $1.06.

 

Now continuing with the example say on Day 0 an investor lodged an application for $1,000 however for some reason the application was not processed. The application may have been buried in someone’s in-tray, stuck behind another application, basically one of a thousand reasons why things don’t go as planned. So on Day 5 the lost application is found and is processed using the transaction date of Day 0; thereby using the unit price of Day 0 ($1.00). Assuming there are no other market movements on Day 6:

 

• The valuation would increase by $1,000 to $2,060
• The units on issue would increase by 1,000 unit to 2,000

 

However notice that the unit price has fallen from $1.06 to $1.03 although the market didn’t move. The drop in unit price is caused solely by the backdating of the transaction.

 

                               Day 5            Day 6                     Day 6 (restated)

 

NAV                      1,060            2,060                      2,120

Units on Issue         1,000            2,000                      2,000

Unit Price               1.06               1.03                        1.06

 

In order to bring the unit price back to the correct level ($1.06) someone needs to compensate the fund to the order of $60 ($2,120 less $2,060).

 

So under what circumstances should compensation be paid to the fund and/or investor?

Reasons for Backdating
First, let’s look at some of the reasons for backdating.

 

Backdating occurs because we all operate in the real world. In a perfect world all applications, redemptions, switches, etc would be processed on the day they are received. There would be no peak volume days, staff shortages, system delays or any of the other 1,000 issues that can go wrong with registry processing.

 

Backdating is also necessary where processing errors have occurred and transactions need to be entered again. In these instances it is clear that the Scheme Operator should provide compensation.

 

Certain transactions by their nature will always cause a backdating impact. Each year funds suspend unit pricing while they calculate their annual distributions. Once the distributions are completed and unit prices calculated for the suspended period all the transactions that occurred during that period will be backdated. In some cases this can be up to three months. Additional those investors requesting reinvestment of their distribution would have that transaction backdated to 1 July. As we have seen backdating impacts existing unitholders and the question needs to be asked whether there should be compensation to the existing unitholders? It could argued that this delay is a structural issue of investing in managed funds however this still leaves the issue of not treating all classes of unitholders equitably.

 

There are a raft of other transactions that are typically processed at an earlier date than their transaction date. These include Advisor service fees, Contributions tax, Pension payments, Plan transitions, etc. In most instances there will be a large number of small transactions however the length of backdating can be substantial. When analysing these transactions you need to take into account the size of these transactions in relation to the size of the fund. The trick is defining what small actually is. Any backdating policy should reference these type of batched transactions and define a policy for compensation. Most operators we have come across review backdated transaction individually however these batched transaction are rarely mentioned in unit pricing policies.

 

 

Rules & Regulations 

 

Moving on to the rules governing backdating. Firstly Section 601FC(1)(d) of the Corps Act provides that in exercising its powers and carrying out its duties, the responsible entity of a registered scheme must treat the members who hold interests of the same class equally and members who hold interests of different classes fairly. The issues with backdating are all about ensuring that incoming or outgoing members are treated equally with existing members.

 

The IFSA standards provide more specific guidance on backdating. Section 9.3 – you must consider the impact of transacting investors on the Scheme with consideration given specifically to the impact of backdating. Section 10.3 – Scheme Operator must have a backdating policy in place, documenting under what circumstances impacts of backdating will be funded by the Scheme Operator. Regardless of approach, the Scheme Operator must have a process in place to monitor the backdating of transactions and fund any unreasonable impacts as defined by the Scheme Operators policy.

 

So what is unreasonable? Standard No.17 provides some guidance that an unreasonable impact would be anything above the standard 30 basis points and/or $20. So two points come out of section 10.3:

 

• How do you monitor backdating transactions, and
• The definition of unreasonable impacts

 The monitoring of the level of backdating is going to depend on:

 

• The sophistication of your unit registry system, and
• Your relationship with the unit registry manager

As the issue of the unit price is the responsibility of the Unit Pricing department that department needs to have an insight into the level of backdating that is occurring, whether the function is internal or outsourced. As we will discuss later there are varying standards that can be applied in defining the parameters for backdating however this need to be based on actual facts, actual observations of how your business operates.

 

Lastly, we have the ASIC/APRA Guide to Good Unit Pricing Practice which states that the product provider should fund any backdating impact. Interestingly the guide does not differentiate between losses and gains arising as a result of backdating; however most operators are only funding losses.

 

Survey Results

Against this background in June last year we were asked by a client to undertake a short survey of the market practice in relation to backdating. The review surveyed a number of market participants offering a range of products across both retail and wholesale clients, with both in-sourced and outsourced administration. This is in no way a view of the whole market however it does give some insight into market practice.

 

So to the findings; and I’ll discuss these in more detail.

 

• Backdating standards vary between organisations dealing with managed funds vs superannuation products. 
• Performance standards vary from T to T+10 business days.
• Varying levels of materiality are applied as a hurdle before applying compensation. Many organisation use a combination of basis points and dollar materiality.
• Compensation is generally made for the full backdating exposure (from effective date to processing date).
• Generally where transactions are processed outside performance standards compensation is made on a transaction basis with no netting applied.

 

Managed Funds vs Superannuation 

 

Due to the greater paperwork requirements generally superannuation products have longer cutoffs for backdating than Managed funds. When you start looking at corporate super the timelines become even greater and can extend up to 3 weeks. The difficulty becomes determining who is at fault, the Product provider or the customer, if paperwork is not filled in correctly; and therefore who should compensate.

 

Performance Standards 

 

From the survey we found that performance standards vary greatly ranging from T all the way up to T+10. Transaction processed outside this performance standard would be treated as an error and compensation would be applied. The organisations dealing with Wholesale funds could be reasonably guaranteed of meeting a deadline of T for processing all transactions however imposing this standard on a retail fund would be overly harsh. The difficulty with setting a backdating cutoff is that it:

 

• Must be based on facts. You need to review the level of backdating over the past 12 months and make an assessment. The cutoff cannot just be a catch all for slack processing standards.
• If the Product Issuer is funding all losses then a longer cutoff will reduce the instance of losses. There may be some pressure here from other areas of the organisation to have longer cutoffs.

Although there are differences in backdating cutoffs the most important aspect is to have a defendable position as to how you determined the cutoff. Again, this should be based on facts like an annual review of backdating trends.

 

As an aside this review of backdating trends could also be extended to other areas such as a review of:

 

Potential arbitrage – by identifying large trading or switching volumes. You could look at:

 

• Investors who have high dollar value of switches
• Investors who gain more often than they lose
• Investors who receive large dollar benefits from backdating

Potential fraud - for example where there is regular backdating by a particular operator

 

• Advisors who regularly switch all clients
• Efficiency measures. An increasing rates of backdating could highlight other issues such as staff shortages, lack of training, etc.

Once you have determined the cutoff for applying compensation you then need to determine the materiality level. In our survey we found Scheme Operators applying materiality of between 1 basis point and 10 basis points. The positive is that everyone is applying a tighter materiality than suggested in the ASIC/APRA Guide to Good Unit Pricing Practice. As with unit pricing tolerances it may be appropriate here to apply differing tolerance levels depending on the type of fund involved. Applying too tight a tolerance will result in multiple compensation claims and all the associated paperwork required.

 

Compensation 

An important consideration in setting a tolerance level will be the level of sophistication of your unit registry system. It may be a fairly straightforward process to establish a policy where any transaction not processed on T receives compensation however then each transaction needs to be checked to see if it falls under or over the materiality level. Now it may seem like a simple calculation to divide the amount of the transaction by the fund size however if there is significant volume this will add to the workload especially if there is an involved good value claim process.

 

So the next area to look at is when does compensation apply from. Should it be from the original transaction date to the date it was actual processed? If you have a backdating cutoff of 3 days you would actually only need to compensate for the number of days less 3 days. From our survey we found that all participants were compensating from the date the transaction should have occurred.

 

So now to the big dollar question; will the backdating policy compensate just losses or will it treat gains and losses equally. I say it’s the big dollar question as this is the amount the scheme operator is going to be required to fund. There have been a number of instances where backdating policies have been set and at the end of the year the scheme operator has found that they have had to compensate substantially more than they had intended. Although you can undertake substantial analysis on backdating behaviours in the past, as they say in PDS’s, past performance is not guarantee of future performance. I would suggest that you test your policy under various conditions where the volume of backdating increases and assess the potential bottom line impact.

 

ASIC and APRA’s requirement is that investors are not negatively impacted however the Corps Act only requires us to treat all classes of investors equally. As a result if we are going to compensate investors for losses caused by backdating shouldn’t we also not allow then to benefit from backdating gains? Our survey found that no operators were compensating for gains as a result of backdating. This is understandable as if gains were taken they would need to held in reserve to offset any future losses.

 

Netting 

And finally to netting. As I mentioned earlier all participants in the survey did not apply netting and analysed each backdated transaction. As a result you could have 2 backdated transactions on one day, one with a gain and one with a loss, the operator would have to fund the loss only.

 

If you did contemplate netting transactions it does throw up a number of issues for consideration:

 

Should profits be netted off against losses?

• Over what frequency should netting be applied (eg daily, monthly)
• At what level of granularity should netting be applied eg at transaction level / transaction type? by fund investment option? by fund sector?
• Should any other metric be applied to the netting eg checking materiality on the fund?

At first glance it would appear that backdating standards across the industry should be similar however there are valid reasons for differences. Any backdating policy must be supported by research of the level of backdating, say over the last 12 months.

 

There is always going to be tension between Risk and Compliance who will want tighter standards for backdating cutoffs and management who will want broader standards so compensation payments are lower. In order to assess the potential financial impact remember that the future doesn’t always replicate the past. In order to monitor the level and cost of backdating these should be reviewed monthly by both the Unit Registry and Unit Pricing Managers. As noted earlier most operators have adopted to only compensate backdating losses and not to apply netting. While this is a conservative approach offsetting backdating gains with losses could allow a tighter cutoff to be applied.

 

Finally, there are some unit registry systems that now allow automated backdating adjustments and provide a summary amount to be funded at the end of each days processing. Although these systems are efficient they need careful monitoring so the compensation amount does not exceed estimates.

 

In conclusion I hope I’ve provide some useful information and ideas that you can use. 

Definitions

 

This blog will be primarily a professional blog discussing issues regarding investment accounting, unit pricing, custody, middle office focusing on the investment management industry and the associated service providers. However there may be instances where I write about other topics that interest me. In simplest terms, I write about what I’m most interested in (or passionate about) at the time. If you don’t find a post interesting, skip out for a bit and then check back in. I don’t expect anyone to read all of my posts.

 

I thought the best place to start would be with some very basic definitions so that if you're looking at this blog for thie first time you know if this is what you are looking for:

 

Some of these links may help in explaining where investment accounting fits in:
http://www.statestreet.com.au/investment_administration.html


For a definition of custody:
http://www.statestreet.com/capabilities/investment_servicing/products/is_229_custody.html
http://www.globalcustody.net/default/definition/


For a definition of Investment (Portfolio) Accounting
http://www.statestreet.com/capabilities/investment_servicing/products/is_270_portfolio_acctg.html

Hope this is what everyone is interested in and will be back soon with lots of interesting (hopefully) discussion.