A common frustration that we hear in the private wealth management segment of the industry is about how investments are classified by third-party providers, perhaps investment platforms or software providers. We commonly hear of people’s frustrations associated with trying to do asset allocation to suit their investment thesis, only to have client reports coming out saying that an investment is in one classification, yet according to their investment thesis, it is another classification. A classic example of this is on the ASX is IVV, the iShares S&P 500 ETF which one would argue is very much an ‘international’ investment but because it is listed on the ASX many sources suggest that it is an ‘Australian’ investment.
Just imagine that after taking on a client with a proposal around how investments may be allocated to a strategic or tactical asset allocation, having to explain that to investor clients that the thesis is correct, but the platform or software is incorrect. The problem gets larger if one firm requests that the categorisation change to a different setting, only to find that different firms want different settings also !
Frustrations aside, what do we learn from this ? What we learn is that when adopting an investment thesis or approach that involves categorisation of investment securities, particularly when they are used in asset class specific model portfolios, it is critical that the owner of the investment thesis own also the way that the investment securities are categorised, which may be subjective to each firm in some instances also.
In terms of portfolio management software, this means that if your value to your clients is all about multi asset class investment strategies, you almost essentially need the ability to define such categorisations of investments to suit your specific investment thesis, otherwise, you run the risk that you will be talking one language to your clients, and your reports or system will be talking another.