3 key challenges for SMEs in making the most of their investment portfolios and how to address them

Generating accurate positions and cash flow projections for the front office before the start of the trading day can be difficult, especially if it involves investments that are spread across regions and asset classes. (Image: Pexels)

Credit and Finance for MSMEs: As small and mid-sized companies build more complex portfolios that blend public and private assets, they need to take a holistic view of all investments to quickly assess risk and make informed decisions. For some organizations, a more complex portfolio may mean rapidly adding public and private debt, bank loans, real estate, and other vehicles, while others may be just starting with floating rates or derivatives. Regardless of the organization’s unique situation, there will almost surely be an equally unique and evolving landscape of obligations and compliance concerns.

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Unfortunately, many small and mid-sized companies are unable to effectively meet these responsibilities because of outdated processes and data systems. The majority of small and mid-size companies still rely exclusively on the traditional back-office accounting book of records (ABOR) which treats positions as accounting entries that are not investment-centric. The outdated practice of using this type of static information is the foundation of three of the most common challenges that small and mid-sized organizations face.

Receiving Complete and Timely Data

Generating accurate positions and cash flow projections for the front office before the start of the trading day can be difficult, especially if it involves investments that are spread across regions and asset classes. Data obtained from external sources are not always timely and requires consolidation and normalization to create a real-time investment book of records (IBOR) that investment managers and traders can confidently rely on.

For smaller teams, adding headcount to process this data isn’t an option. For organizations to seize opportunities, they need to invest in IBOR systems that are purposely built to deliver timely and accurate views of performance, exposure, liquidity, and risk to the front office with the ability to scale with the organization’s needs.

Moreover, without a holistic, real-time view of cash flow projections that take into account the day’s trading activity, subscriptions, redemptions, accruals, and maturity opportunities will be lost. Portfolio managers could be left with uninvested cash or overdraft due to a lack of synchronized data between back-office source systems.

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Performance Analytics and Benchmarking

Without a holistic view of their portfolio, successful portfolio managers will be unable to understand if the investor’s success is the result of allocating their portfolio’s assets to various segments, selecting specific securities within a given segment, or the combined effect of both allocation and securities selection within a segment.

If you are responsible for managing or monitoring investment portfolios, then you probably already know that your performance and attribution analysis is only as good as the data it is built upon. When it comes to portfolio data, the last thing you want is to have incomplete or inaccurate data to use for your analysis. You need to be able to have confidence in your data so you can have confidence in the conclusions you reach.

Data integration is vital to performance, risk, and compliance. Small and mid-sized organizations should ensure they have a plan in place to maintain data quality. With the same data and analytics at the heart of each, organizations can optimize data integration from performance measurement to supporting compliance and risk workflows.

Compliance Risk

Investment compliance policy is crafted to ensure clarity about how the assets should and should not be invested by an investment manager. A typical investment compliance policy includes what types of assets the account will invest in and what investments are off-limits. It also contains the rules around the spread of credit ratings that the portfolio manager needs to maintain. Additionally, a compliance policy includes risk guidelines and rules about when the investment manager should notify the client of issues.

Many investors simply rely on the manager to inform them of any breaches. The conflicts of interest here is obvious and due to the manual nature, managers or investors only check compliance on a monthly or quarterly basis – therefore creating a risk.

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Focused IBOR solutions have inbuilt daily compliance checks that alert the investors and portfolio managers of any violations and breaches, thus eliminating any potential issues. They also provide pre-trade and post-trade compliance.

Quickly Assessing Risk and Making Informed Decisions

The institutional investment world, especially for small and mid-sized organizations, has been a place of balkanized data and a lack of a holistic view at a portfolio level. As a result, institutions have been unable to seize opportunities.

The technology exists to improve enterprise-wide visibility to risk and to enable more informed decision-making. However, too many organizations are still hampered by legacy technology and the use of manual processes to aggregate data. The solution is to invest in an investment accounting and analytics solution that aggregates disparate data sources, applies analytics, and delivers information to decision-makers in real-time.

Anurag Singh is the Managing Director — India at Clearwater Analytics. Views expressed are the author’s own.