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Transparency is an increasingly important investment consideration for institutional investors, according to a new survey commissioned by Northern Trust, but there is a lack of agreement on how to gather and analyze the necessary information on alternative investments such as hedge funds, private equity, infrastructure and natural resources.
Transparency led all investment considerations among respondents and has grown in importance since the 2008 financial crisis, the survey revealed. Respondents indicated the higher level of scrutiny applies to both traditional and alternative investments, such as hedge funds, private equity, infrastructure, real estate and natural resources.
Key details of the survey:
- “Degree of transparency” was cited as very important by 63 percent for alternative and 62 percent for traditional investments, leading all other considerations.
- Transparency became more significant after the financial crisis, cited as the most important post-investment consideration by 21 percent for traditional assets and 17 percent for alternatives, compared to 9 and 3 percent, respectively, pre-crisis.
- Risk management is the most important driver for transparency in traditional or alternative investments: 73 percent of respondents said portfolio risk management was the most important element, while 53 percent cited regulatory requirements and 43 percent cited competitive considerations.
- No clear consensus exists around which department within an organization ensures that existing and potential investments are adequately transparent, with responses pointing most often to either the investment management or risk and compliance functions.
- Asset managers and investors tap a variety of sources for information on both traditional and alternative investments, including specialist databases, media reports and in-person visits. Four out of five respondents rely heavily on internal data management and analytic capabilities to manage their data. Only 6 percent outsource this function entirely.
“These results tell us that investment transparency is a growing priority, but asset managers and institutional investors remain unsure of how to best achieve it,” said Pete Cherecwich, president of corporate and institutional services at Northern Trust. “As alternative investing has reached the mainstream, the industry would benefit from consistent standards and stronger policies around transparency.”
The independent survey of 200 asset managers and institutional investors was conducted in February 2017 by The Economist Intelligence Unit and sponsored by Northern Trust, the company said in a statement. The EIU surveyed 200 executives of organizations ranging from private equity firms and hedge funds to corporations, nonprofits and insurance companies. Respondents were dispersed globally, with 60 respondents each from North America, Asia-Pacific and Europe, and the remainder from the Middle East.
Half the sample was composed of respondents from organizations with more than $5 billion in global AUM, Northern Trust added.
Founded in Chicago in 1889, Northern Trust Corporation is a provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. As of March 31, 2017, Northern Trust had assets under custody of $7.1 trillion, and assets under management of $1 trillion.