Data analytics use on the rise to inform investment decisions

Defined benefit schemes have started to monitor more closely relevant scheme data to make more appropriate investment decisions, and some have called on defined contribution schemes to follow suit. But others have questioned the value of checking models too frequently. 

A survey of 200 global institutional asset owners, including UK pension funds, by asset manager State Street found 83 per cent had increased investment in data analytics over the past three years, with 12 per cent making a “significant” increase.  

Ian Hamilton, head of asset owners at State Street, said investors have known for a long time that data and its management has been an issue and is something they need to come to grips with.

“That comes out clearly in the research with 87 per cent saying data is a top strategic priority,” he said. The use of data falls into two categories – to help with investments and to help with regulatory requirements.

“As they invest in potentially more sophisticated, more complex or potentially different types of assets class, the need for information may be different, or it might be [greater]. Or in some cases it might be information they have never seen before if they are in a completely new asset class,” said Hamilton.   

The challenge for asset owners is creating useful analysis from the data. The research showed only 33 per cent of asset owners are getting the full benefit from it.

Schemes that are investing in data infrastructure are doing so in so-called portfolio-optimisation tools. “[Schemes] are looking at becoming more sophisticated about 'how do you look at your portfolio as a whole, how do you look at that against your liabilities, how are you aware of the overall risk you are taking as a scheme?',” said Hamilton.

Schemes are using asset-liability models to inform investment strategy, said Yves Josseaume, partner in the asset-liability modelling team at Aon Hewitt. There is more demand for in-house modelling tools with very big schemes, he added.

“For most of the other trustees… they still rely on the consultant, but we try to deliver the outputs in a really useful format, with charts and on the web,” said Josseaume. “Whether they look at it very often is a question for the smaller clients.”

Richard Butcher, managing director of independent trustee company PTL, said the use of data could become beneficial for DC schemes to create default funds appropriate for the membership of the scheme. 

“This could become more sophisticated as time passes, as we hold a phenomenal amount of information about members. If we take it in a collective way we should better be able to understand the risk profile of any given scheme,” he said.

“If you follow it to its logical conclusion you end up with a different investment profile for each individual member.”