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AIMCo innovations

A winning risk management program based on data-driven excellence

About the author:

Michael BakerMichael Baker is Senior Vice President, Investment Operations, AIMCo, Alberta, Canada.

 

Michael Baker’s responsibilities entail overseeing AIMCo’s operational infrastructure, which spans Investment Operations, including the Middle and Back Office, Investment Administration, Private and Real Estate Administration, and Business Technology. Michael Baker has been at AIMCo for four years and brings to AIMCo 30 years of banking experience. His last banking role was Executive Vice President, Retail Financial Services, at ATB Financial where he managed over 3,000 employees across all retail branches.

About AIMCo:

The Alberta Investment Management Corporation (AIMCo) is a Crown corporation, owned by the Province of Alberta, and one of Canada’s largest and most diversified institutional investment managers. AIMCo was established on January 1, 2008, and operates independently from the Government of Alberta with a mandate to provide superior long-term investment results for its clients. With assets under management of over C$80 billion, AIMCo invests globally for 27 pension, endowment, and government funds in the Province of Alberta, including the Alberta Heritage Savings Trust Fund, serving nearly 310,000 active/retired public sector employees. More information at www.aimco.alberta.ca.

To optimize client investment returns without undue risk, AIMCo wanted a data-centric operating solution that would meet rigorous data and risk management criteria. This article describes how we successfully implemented an innovative program to make transformational risk and cost reductions based on reliable data, increased automation, and virtual elimination of manual processes.

As one of Canada’s largest and most diversified institutional investment fund managers with a global portfolio of over C$80 billion, we at Alberta Investment Management Corporation (AIMCo) pride ourselves in serving a client base of 27 pension, endowment, and government funds in the Province of Alberta, AIMCo’s sole shareholder.

Our service includes meeting a set client mandate of generating maximized risk-adjusted returns, while striving to be a low-cost provider by keeping fees at only 40 basis points and reducing operational risk to the minimum.

However, to fulfill our client-centric goals, we needed a new operating platform, which could improve our data accuracy, manage risk better, and mitigate operational risk. Without achieving these capabilities, we would have been unable to provide the kind of superior investment service our clients expect of us going forward. This article highlights the path we took to find the solution we sought and outlines the key benefits achieved, which also enabled us to win the 2014 SimCorp Risk Management Excellence Award.

Identifying functional shortcomings

Prior to becoming a Crown corporation six and a half years ago, AIMCo had not spent many resources on investing in its infrastructure. However, as the company was transforming, our investments were becoming more complex, and we realized our existing infrastructure could not support the kind of dynamic future we envisioned for the organization.

The 18-year-old legacy software was outdated, cumbersome, inconsistent, and failed to measure up to the type of leading investment manager we were determined to become.

The 18-year-old legacy software was outdated, cumbersome, inconsistent, and failed to measure up to the type of leading investment manager we were determined to become. Business areas where the infrastructure fell short were risk and data management, trading, performance attribution, and accounting. The main functional deficiencies included:

  • Data unreliable for decision-making, not to mention audits
  • Departments operating in silos with many versions of the truth
  • Workarounds consuming excessive resources and time
  • Inability to meet growing complexity (move to illiquid assets, direct deals)

Having identified these shortcomings, we realized in 2010/11 that we had to transform ourselves into a data-driven organization capable of providing accurate, timely, and consistent data for our risk and investment professionals to do their client-related work more efficiently. Among the requirements were better data, processes, and capabilities for providing optimal risk-weighted returns.

Data management as core function

Addressing the issue of improving data quality was the fundamental belief behind launching the AIMCo Innovations program, a business-led, data-centric change program based on two main goals:

  • Reducing operational risk
  • Improving data accuracy

Among the actions to achieve these goals was the adoption of new security master and reference data, enriching and verifying these through each step of the investment process to ensure correctness before proceeding further. As we followed this procedure, we shifted away from a final/ex-post check to integrated checks throughout the process, which enabled us to reduce risk.

We also developed a data management governance structure. The key was to identify internal and external suppliers and create key performance indicators (KPIs) that would help govern the data quality along the value chain. The data management team was responsible for:

  • Ownership of data vendor relationships including contract negotiations and vendor selection;
  • Data quality assurance of all external data delivered to AIMCo, including security master and reference data;
  • Economic procurement of required data;
  • Ownership of all data that is stored in AIMCo’s platform, including market data, static data, and reference data; and
  • Data quality in the datamarts delivered to risk management, performance measurement and attribution, and client support.

This structured data management approach enabled AIMCo to increase quality and minimize operational risk, while delivering the required high-quality data to clients on time (see further below).

Choosing the right software partner

As we embarked on our program to overhaul the operating platform, we wanted to make sure that we aligned ourselves with best-in-class companies and systems to reap the benefits of a long-term solution that was scalable enough not only to meet present but also future challenges.

In our research to find a future-proof solution, SimCorp emerged as one of those software providers with whom we wanted to partner and we decided to implement the SimCorp Dimension platform, which went live on August 12, 2013. The partnership that has ensued strengthens the focus on people, processes, and technology we were trying to achieve with our data-driven change program.

People matter in innovation equation

Ensuring we employed the ‘best and brightest’ was particularly important during the course of AIMCo Innovations. To drive our successful implementation, we dedicated a team of 25 internal resources and paired these with the best global consultants we could find. With regard to SimCorp and our strategic partner Axxsys Consulting, we worked very closely with dedicated teams of specialists, who provided deep knowledge and expertise with regard to the system, project management, configuration, the industry, and core processes. We were able to accomplish our goals with a small group of highly motivated partners to get the job done.

We also engaged with these partners to help de-risk the change program, including not only the operational risk of running the business but also the transformational risk of large-scale change. Having trusted advisors and partners interested in a long-term relationship and who understood our industry and business mitigated the inherent risks that stood in the way of reaching our goal.

At the end of the day, AIMCo Innovations was only successful because it was a business-led initiative that involved all AIMCo teams including Investments, CFO Office, Risk Management, and Investment Operations. A clear ‘tone at the top’ strengthened the focus on driving the program’s successful program.

Transitioning from the old order to the new

A big step forward in our program was moving away from a legacy system where asset classes were not reflected with their proper characteristics to representing instruments correctly. This step would enable us to capture accurately risks associated with valuation and counterparty. Similarly for our net asset value (NAV) calculations, we built in controls to highlight if a NAV was incorrect. We also benefitted tremendously from improved straight-through-processing (STP) flows, where we now perform an automated calculation of our hierarchy of funds in our funds-of-funds structure.

Implementing these key features allowed us to end the time-sensitive processing associated with the old system. Timing was crucial in the old order. We had to take snapshots from our legacy system at the right point in time, or the data was gone – a significant operational risk. The new AIMCo Innovations infrastructure gave us full access to historic data, in addition to full audit trail possibilities to prevent fraud and improve our compliance controls.

When it comes to accounting, we have also taken a leap forward. With the old system, accounting worked with three separate frameworks – CGAAP, IFRS, and PSAB – hampering efforts to balance ledgers or set up timely transactions. We created a basis for integrating our systems and enabling data to flow efficiently. In the end, we supported bringing in flexible systems with improved control and governance over investment and accounting data.

A new operating dimension

In short, we have moved away from a quarterly, error-prone manual process that at best could only produce imprecise results, to daily, automated, and precise calculations. In addition to providing our clients with better quality data, we can now:

  • Significantly reduce operational risk;
  • Take more investment risk controlled with better risk budgeting;
  • Make investment decisions using high-quality data to support asset allocation and the investment process; and
  • Support investments with an effective operating infrastructure to enable internal active management and direct investments.
Operating state before and after program implementation Journal SimCorp

Operating State Before and After Implementing AIMCo Innovations

Figure 1. Operating state before and after program implementation. Source: AIMCo, August 2014.

Consistency in investment decision-making

When managing our client mandates, we strive to achieve the best risk-adjusted returns. The AIMCo Innovations program has helped us by enhancing our view of risk, based on understanding the underlying risks associated with each investment, and by ensuring consistent and high-quality data for our performance measurement.

As a result, in addition to increased quality and improved timing of data, we achieved a consistent view across the organization, which enables our portfolio managers to trust the results and make sound investment decisions. Our front-office team now has cleaner, more accurate, and timely data to analyze portfolios and make investment decisions.

Another key benefit we gained from adopting the SimCorp solution was the improved quality of data in our accounting. We know that our records are true and with the ability to support our three accounting frameworks, this really helps us provide our clients with the right numbers when they produce their financial statements.

Saving costs with same staffing levels

The software solution we have implemented also helps us by lowering our operating costs overall and making sure the costs we transfer to our clients remain around the 40 basis point fee-paying yardstick.

Prior to implementation and owing to the system limitations described earlier, we outsourced the accounting and performance of a number of funds to our custodian on our externally managed funds. This cost more, and had the impact that client reporting and consolidated accounting was a highly manual process with inherent risk. The SimCorp solution allowed us to insource our externally managed fund accounting, reducing operational risk and the associated direct costs. That alone saves us C$500,000 a year without any increase in the full-time equivalent (FTE) headcount.

Measurable risk mitigation

AIMCo Innovations’ implementation enabled us to measurably mitigate risk through each step of the investment process while also optimizing risk-adjusted returns for our clients. Winning the 2014 SimCorp Risk Management Excellence Award was a major achievement for AIMCo’s people, processes, and technology. Choosing us for our proven excellence in adopting the program reflected the success we had in reducing operational risk and improving data accuracy for superior investment decision-making.

AIMCo today has high-quality information that is consistent, reconcilable, and understandable. Modern, effective infrastructure and software have replaced outdated processes and systems, greatly reducing risk and increasing efficiency. Our clients benefit from one of the most robust decision-making platforms in the investment world, and we leverage that data effectively.

Our business is all about ensuring client satisfaction. As we grow, we want to make sure we have the scalable infrastructure we need to keep costs low and clients satisfied. But our industry is very dynamic and it’s crucial we also have the flexibility to meet future needs. Having the right operating platform in place will help us achieve this.

simcorp paris award Journal SimCorp

SimCorp Risk Management Excellence Award 2014

SimCorp announced AMICo the winner of its 2014 Risk Management Excellence Award. The award was presented at SimCorp’s annual global investment management industry event, the International User Community Meeting (IUCM), in Paris on September 18, 2014. The SimCorp Excellence Awards acknowledge, reward, and promote best practices in risk, cost, and growth management in global investment management.

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