Fund-of-funds (FoF) portfolio management is an extremely challenging job. A typical FoF portfolio is heavily diversified, and thus the sheer volume of data is enough to overwhelm even the most experienced teams, making active investment analysis and investor reporting a near-impossible undertaking.
The unfortunate reality is that most fund-of-funds firms lack the most effective tools to manage their portfolios – from tracking of partnership commitments to understanding underlying look-through asset exposure. This presents major challenges to fund-of-fund managers. It’s not possible to make well-informed investment decisions in line with your strategy without a clear snapshot of your current exposure. Inevitably, this results in portfolio management becoming reactive instead of proactive, leading to over- or under-allocation. By the time anyone realizes something is wrong and the portfolio is at serious risk of underperformance, it’s too late to change course.
Having the right tech stack can prevent most of these issues and empower fund-of-fund managers to adopt a proactive approach to portfolio management. There are three general criteria you should assess during your quest for the right portfolio management software. These will ensure your chosen fund-of-funds system is the best fit for your investment operations:
- Robust cashflow management capabilities and data structure
- Supports look-through asset tracking and analysis
- Flexible dashboarding and reporting tools to support your investor reporting and fundraising
1. Robust cashflow management capabilities and data structure
Cashflow management is the heart of fund-of-funds operations. Whether it’s through primary or secondary investments, diversification is paramount for a fund-of-funds – they invest smaller amounts of capital, but across many different commitments (i.e. up to 100+). As a result, the key challenges for fund-of-funds investment teams are:
1) Effective process management and tracking of all the capital notices happening around the clock – on a monthly, weekly or even daily basis (for high-frequency trading secondary specialists)
2) Ensuring good cashflow management with ongoing, periodic forecasting of incoming vs. outgoing cashflow. From previous experience, such exercises can increase a fund-of-funds’ returns by a few hundred basis points if carried out effectively.
It is a fund-of funds’ fiduciary duty to ensure that allocations and commitments are executed according to their planned investment strategy. Operationally, it’s essential for a FoF manager to have a systematic and scalable way to manage the growing volume of data as they lay the foundation for all analysis; including return analysis at single fund level, performance benchmarks against peers of the same vintage year, and assessment of the portfolio’s actual allocation vs. planned allocation. Just as importantly, these calculations should update dynamically so they are current at any given time.
While evaluating portfolio management software, below are important criteria to look out for as a starting point. These features will ensure that your system can support the data structure and granularity that are crucial to a fund-of-funds’ success:
2. Support look-through asset tracking and analysis
For a typical fund-of-funds manager with a diversified portfolio of 50 partnership investments, the number of underlying look-through assets can consist of 1,000 – 2,000 companies (sometimes more). As most partnerships provide portfolio updates on a quarterly basis, this means that the fund-of-funds manager will need to update the portfolio around 4,000 – 8,000 times per year. Running this process on Excel is not only labor-intensive and time consuming, but the likelihood of human error is high. For these reasons, some fund-of-fund managers have opted to only monitor a small set of the underlying portfolio data, while others still limit the tracking to fund-level data only.
Recent market volatilities and regulatory changes have put pressure on fund-of-funds managers to track their portfolio exposure at the look-through asset level. Certain institutional LPs (such as insurance companies) have regulatory obligations to disclose their holdings in a more accurate and transparent way; therefore, they need to be able to assess the level of performance and risk at a glance whenever needed so they can make quick, informed investment decisions. Firms that don’t have access to this level of insight into their portfolio are doomed to always be reactive, constantly on the back foot playing catch up.
In your search of a portfolio management system for fund-of-funds, look out for the following features associated with look-through asset tracking and analysis:
3. Flexible dashboarding and reporting tools to support investor reporting and fundraising
The right technology can help fund-of-funds managers distill key portfolio insights from a high volume of data, and provide the ability to zoom in or zoom out as required. It’s unfeasible to expect sophisticated, ILPA standard reporting to be generated out of MS Access and Excel – modern software can streamline the labor-intensive, time-consuming reporting process.
Nowadays, being able to configure department-specific dashboards and investor reports should be an industry standard for any fund-of-fund system – in contrast to legacy systems that simply don’t have the underlying technology. The ideal portfolio management software for private markets investors is built on highly configurable tech stacks that come with pre-built reporting templates ready for use, and also give you the option of configuring your own. Typically report-building has been a lucrative upsell opportunity for software firms, because their systems are clunky and require many weeks of engineering or developer time in order to create bespoke reports. What many GPs don’t realize is that these extra costs are completely avoidable – most modern portfolio management solutions are user-friendly and powerful enough to allow user configuration, rather than being wholly reliant on software engineers to hard-code reports.
Self-configuration is an important category in portfolio monitoring software as it allows timely investor reporting, especially when responding to ad hoc requests. It’s also extremely useful for fundraising as it provides FoF managers with the data they need to back up their track record.
Here is a snapshot of the key reporting and dashboarding features you should look for in your portfolio management software:
Given the complexity of fund-of-funds portfolio management, finding the right tech stack to streamline the process is not an easy job. However, there are modern systems available that can more than cater to the unique needs of a fund-of-funds, whether you are a generic fund-of-funds manager, secondaries specialist, or a multi-family office. Choosing the right technology partner is half the battle – with a good system in place and experienced professionals to help you onboard, portfolio management can be a proactive process rather than a reactive one, take far less time and resources than you’re used to and can deliver your investors incredible returns.