Challenges and Costs of Managing Multi-Asset Class Portfolios

Introduction:

Managing multi-asset class portfolios with public and private market investments is an art and a science. Investors are increasingly diversifying their portfolios across various asset classes, mainly using private market investments. However, the benefits of such diversification come with associated costs and challenges of sourcing, allocating, monitoring, and managing private asset commitments and other illiquid assets.?

We explore various manual, time-consuming, and potentially error-prone processes within multi-asset portfolio management, such as liquidity management for capital calls or other client cash needs, illiquid asset rebalancing, trade allocation, and settlement.

Data Aggregation and Asset Allocation Exposures:

One of the primary challenges in managing multi-asset class portfolios is the time and effort required to source data from disparate sources for different investments with different valuation cycles. The multi-asset investor has to gather data across all asset classes, asset types, and piece together a comprehensive view of their current investment allocations, exposures and compare them to their intended target allocation before making any new decisions. This process involves gathering information from custodian data feeds, fund administrators, GP portals, valuation reports, and dealing with different data transfer methodologies such as APIs, SFTP flat files, and PDF reports via emails. This time-consuming task not only requires robust data management systems but also many operations professionals who can interpret and reconcile the data.

Liquidity Management for Capital Calls:

Investors with commitments to private assets such as venture capital or private equity must manage liquidity for future capital calls. A multi-asset investor has to plan for liquidity for private asset commitments in two ways – first is how to invest the difference between current allocation & target commitment to private assets, and the second is how to raise cash when needed for a capital call.? Investors need to keep track of all private asset commitments, unfunded commitments, paid-in capital, realized distributions, etc. such that they can invest in other assets and raise cash for capital calls when needed. When cash is needed for capital calls, the investor needs to identify which asset to draw the cash from while staying within their overall investment targets.? In a multi-asset portfolio with different liquidity/settlement terms, it could be hard to identify and raise the cash in a timely manner to meet this liquidity need. This process becomes more complicated with spreadsheets and calendar reminders when a multi-asset investment team manages assets for multiple clients with multiple private asset commitments.

Cash Management Challenges:

Cash management is a critical aspect of multi-asset portfolio management. Any allocation or redemption from one asset to another or a cash inflow/outflow requires an investment decision that may impact more than one asset or asset class. Forecasting and tracking upcoming cash needs is cumbersome and requires information from various parties. This limited knowledge of upcoming cash needs could create problems meeting liquidity when there are multiple assets with complex settlement terms. Identifying the most efficient sources to raise cash quickly while maintaining asset allocation targets is a critical function of a multi-asset investor. The process becomes more complex when there are multiple client accounts and cash flow needs.

Illiquid Asset Trade Allocation Management:

Illiquid (publicly traded) assets, like hedge funds or interval funds have complex liquidity & settlement terms such as redemption gates, audit holdbacks, settlement windows, and redemption pre-notification requirements. As a multi-asset investor, it is important to keep track of different tranches of investments in these funds and the specific terms for each tranche. The biggest challenge is to identify which tranche to sell when there is a cash need and to keep track of audit holdbacks and other pending settlements. These illiquid asset liquidity terms pose a significant challenge to rebalancing a multi-asset portfolio and bring it within asset allocation or risk allocation targets.

Conclusion:

Managing multi-asset class portfolios requires robust data management capabilities, total portfolio oversight capabilities, liquidity/cash management capabilities, and illiquid asset trade allocation and rebalancing capabilities. The cost of managing such portfolios goes beyond hard costs in terms of data systems, time, people, or errors, but also includes the opportunity cost of missed market returns when an investor cannot implement their investment ideas quickly and effectively into client accounts/portfolios.? Alternative investments and private asset investments are becoming more prevalent not just in institutional portfolios but also ultra-high net worth and family office portfolios. Investment advisors need to leverage technology to solve these multi-asset investment and liquidity management challenges, to optimize returns, and manage risks for their clients.