PBOR for Fund Managers: Innovation or Brand Grab?

Performance book of record or PBOR for short.

A white paper just released by Eagle Investment Systems has fueled talk among investment operations professionals on just what PBOR is and how seriously the concept should be taken. The two critical questions which top the discussion list: just how substantially it differs from the investment book of record (IBOR) and how it can be accomplished.

It sounds like a utopian solution for overworked portfolio and operations managers needing to produce performance reports for a variety of constituents. It also appears that Eagle coined the term, and many fund managers say they never heard of it before the Eagle white paper was published.

Performance is the word investment management firms live and die by. It’s one of, if not the most important question investors ask when deciding where to park their monies. Most investors want fund management firms to do more than give them a single, consolidated figure for return on investment. They want to slice and dice the results to see which asset class or even single security generated the best and worst results, at what market risk, and why.

Of course, portfolio managers, performance managers, compliance managers, human resource managers, and C-level executives need to know the same information, if not more, so they can tweak their investment strategies, report the correct information to regulators as well as investors, and compensate portfolio managers and traders correctly.

Why Worry

Eagle seems to think fund management shops should worry plenty about whether or not they have a single performance view of results from all asset classes, including illiquid private equity and real estate. In a white paper entitled “Characteristics of a Performance Book of Record,” product manager Rich Mailhos warns that fund management shops are finding it difficult and time-consuming to  answer the questions posed by clients, regulators and senior management teams, because of the shortcomings of their performance metrics systems.

To bolster this stance, he cites research findings that fund management firms are using multiple systems to calculate performance results across different client types and asset classes. The bottom line: only one in five firms are “very satisfied” with their ability to access timely, relevant and accurate performance data.

However, to some fund managers and consultants who spoke with FinOps Report, using the data stored in any third-party IBOR platform makes PBOR an automatic given. “PBOR is so intertwined with IBOR there is no need for a separate concept,” says Mark Israel, vice president of financial services firm Sapient Global Markets in Boston. “We are advising fund management clients that if  they have a single IBOR they will be able to generate correct and consistent performance results across all portfolios and asset classes.” Such results can be aggregated in different ways depending on the end user.

IBOR takes the concept of the back-office accounting book of record one step further by adding a whole array of necessary data from other middle-office systems and outside sources. Whereas the accounting variant, ABOR, offers an end-of-day picture of all positions and transactions of interest to investors, IBOR offers an intraday snapshot. That is far more useful for portfolio managers wanting to capitalize on market changes quickly.

Robert Rafferty, a managing director at global financial services consultancy Beacon Consulting Group in Boston, wouldn’t comment on whether PBOR is a legitimate stand-alone concept. However, he did say that using multiple performance metrics engines isn’t the best idea. Using a single IBOR platform is far preferable.

“If multiple platforms, methods or data sources are used, performance teams may have to make manual adjustments such as additional calculations or data consolidation to produce the output,” says Rafferty. Such adjustments may differ depending on each stakeholder’s requirements. For example, executive management of a fund complex may want to see a consolidated performance of all equity investments enterprise-wide instead of just the performance report for an individual fund.

However, what remains unclear is whether fund management firms can rely strictly on their IBOR platform to generate the most granular performance metrics or whether they really need a separate performance metrics engine. The jury is split: of the ten US fund management operations managers contacted by FinOps, six say that an IBOR engine would be all-encompassing while the remainder believe an attached application is necessary to do the sophisticated number crunching.

Leveraging the Data Hub

As the Boston-based subsidiary of mega global custodian BNY Mellon, Eagle is well known for its data management engine that serves as a hub for its suite of portfolio management software. Therefore, it is probably no coincidence that the prerequisites for PBOR listed in the whitepaper are a laundry list of best practices in data management and sophisticated information output that might be a found in a fund management shop smart enough to build all its applications software around a central data hub — or maybe use Eagle’s software.

“The approach outlined in this white paper will not only help firms meet their reporting requirements more consistently, effectively, and efficiently, but it will also improve their understanding of risk and drivers of performance to enable better, more informed decision-making across the organization,” writes Mailhos.

Just what are the necessary capabilities for firms looking to develop a PBOR? Here’s the list: ensuring it supports multiple sources of data, which are traceable back to the original source; flexible error-handling and data validation tools that enable exception-only workflow monitoring; powerful data quality monitoring tools to judge data based on business rules; sufficient granularity to ensure details are tracked, for example by asset type; data enrichment tools to address lag priced assets, notional exposure based instruments and multi-legged return; flexible analytical capabilities that leverage multiple benchmark relationships; flexible analysis for composited portfolios or composites hierarchies, and the flexibility to integrate historical returns of differing periods.

From a data management perspective, these are some very high preliminary hurdles. The consensus of the fund management operations specialists contacted by FinOps Report who read Eagle’s white paper was that the firm was simply trying to stir interest in its data-centric products. The more interest Eagle generates in its PBOR concept, the greater the marketing edge it may gain over other other firms which may offer IBOR platforms along with the capabilities to generate granular and consistent performance results, they believe.

Given Eagle’s white paper offered  neither a clearcut definition of PBOR nor how fund managers can implement PBOR, it isn’t surprising that some fund management firms and their consultants remain skeptical that PBOR is the next big thing after IBOR. At a webinar sponsored by Eagle, nearly half of the attendees had never heard of PBOR before. However, speaking at the webinar were representatives of two mega fund management shops — Invesco and BMO Asset Management — which have embraced the idea of PBOR wholeheartedly.

Time to Think      

Whatever else it accomplishes, Eagle’s white paper puts a spotlight on questions about the efficiency of current approaches to performance analysis and reporting. “It does get fund management firms talking about whether to use home-grown or external platforms and how they should be interconnected. They will have to review the choices out there,” acknowledges Israel.

Fund management firms also have to consider just how far they are willing to go — and how much they can afford to spend — to achieve PBOR. Eagle’s white paper suggests it could get very costly for firms which don’t already have the most sophisticated data management and operational infrastructure.

(FinOps Report would like to hear what you have to say. Have you heard about PBOR and if so, what do you think about implementing it in your firm? We will publish any responses without attribution in the comment section underneath the article.)