Overexposed? The problem is not the picture, but how you are taking it

These words (or similar) were uttered by JP Morgan CEO Jamie Dimon almost 15 years ago when he wanted to know what the firm’s exposure was with the Lehman Brothers collapse. With the infrastructure and processes available at the time, it took over a day to get the answers Mr. Dimon was asking for.

Fast forward to 2023 and there are several investment managers asking the same question when it comes to recent bank failures in both the US and Europe. Unfortunately, some of these investment managers are no better off than JP Morgan was 15 years ago – with no clear real time portfolio view or oversight over their exposure to events such as bank failures. Many firms are vulnerable to a single keystroke (as evidenced by the immediate write-off of USD 17 billion in AT1 Credit Suisse bonds in mid-March).

For the more astute investment managers, the warning signs were in place as exposures could be calculated and visualized. These investment managers were able to use this information to make informed investment decisions and presumably avoid the losses that many of their peers have incurred.

You would not consider using a film-based camera to take a picture and wait an hour or more until it was developed before seeing the result- nor should you follow the same approach when it comes to knowing what the status of your positions, portfolios and mandates are. You need to know the status right here, right now, and make decisions when news is breaking – not when it is already outdated by the time you react.

Consider these factors to get a clearer picture

To ascertain your ability to predict and take prescriptive action when a disruptive event occurs, look at the following factors.

• Position overview: Can you - right now – generate an up-to-date overview of all of your positions, irrespective of asset class, region, time of day, etc.? If not, why not?
• Speed to analysis: do you have the capabilities to calculate your exposures in real time, using a variety of risk factors and models? If you are relying on spreadsheet models to calculate exposures, the results are already out of date by the time the spreadsheet is built.
• Transaction-based calculations: are your exposures calculated from the ground up, giving a much more accurate informal picture of exposures and up-to-date performance versus waiting for final marks-to-market? If not, what latency period are you dealing with before your exposures are known?
• Breakdown/drill-down of exposures: can you “slice and dice” your exposure into individual components? For example, regional banks?
• Private markets – peeling back the onion: how well do you understand the underlying managers’ investments and portfolio companies and exposures to same?
• Stress testing: how well are you able to model/stress test the liquidity of your portfolio?
• Duration and liquidity: what is your duration risk? Are you protected against interest rate increases? Can you meet your liability cash flows as rates continue to rise?

If the answer to any of these questions is not clear, perhaps it’s time to take a hard look at your investment management infrastructure and determine what is holding you back.

Recent events show us that the volatility experienced over the past 18 months has now become a way of life. In such conditions, you can’t afford to be dependent on yesterday’s news to make today’s decisions. Knowing where you stand and being able to act instantaneously is the edge you need to capture alpha, not just chase after it with the rest of the flock.

Benjamin Page-Fort, Director GTM Strategy, SimCorp

Transaction-based total portfolio view = Immediate overview of exposures

In terms of investment management infrastructure, one of the most critical capabilities you need is a total portfolio view - knowing what your current and future positions are, across all asset classes you trade in, in near real time (i.e. within a couple of minutes). If you don’t already have this, the hours you are delayed in figuring this out is time that your competition is using to outperform you.

SimCorp’s investment management platform offers a superior portfolio view, as it’s based on a single data source and built from the ground up – from individual transactions – which in turn you can use to determine your exposures. The key advantages of leveraging a transaction-based portfolio view include:

• All assets and transactions are in the same system- you do not have to pull data from multiple sources (e.g. separate alternatives and equity/fixed income/forex systems) to aggregate exposures.
• Full rather than fragmented picture of exposure and risk.
• See impact of changes as they are made. With a transaction-based system, you have the data from the ground up. All changes to exposure are shown in near real time; you don’t have to wait for manual updates or other causes of latency to know what your situation is.
• You can conduct stress tests/risk simulations on top of your exposure models to see how you are likely to fare in volatile conditions, helping you make informed investment decisions.

Note that the total portfolio view covers all asset classes, including private markets.

SimCorp gives you an edge in the hunt for alpha

To sum up, recent events add proof to the fact that the volatility experienced over the past 18 months has now become a way of life. In such conditions, you can’t afford to be dependent on yesterday’s news to make today’s decisions. Knowing where you stand and being able to act instantaneously is the edge you need to capture alpha, not just chase after it with the rest of the flock. Find out how SimCorp can give you this edge and trust in what your data is telling you.