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Insights Less the Headache: The Next Generation of Shadow Accounting    

Ledger by SEI Novus modernizes shadow accounting technology and allows institutional investors to confidently sit on a fully reconciled IBOR

Andrea Gentilini
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Informed investment decisions require accurate data. Have you ever researched, strategized, and collaborated to reach an investment decision, only to discover that there was an issue in the underlying data that invalidates your conclusion? It’s a terrible feeling.

A few weeks back I was talking with an Investment Director at a large US-based endowment. Consider what they shared with me:

“The entire world is talking about advanced analytics and throwing around buzzwords such as machine learning and artificial intelligence; the reality is that we have to spend about half of our time making sure that our basic data is accurate.”

This isn’t an isolated sentiment. There is an unsettling amount of uncertainty around what’s actually inside some of the largest portfolios in the world. Depressingly, asset owners are constantly at risk of falling into a garbage-in-garbage-out cycle indefinitely, with every new manager reporting cycle. If the custodian data is wrong, it doesn't matter how advanced and innovate your portfolio planning strategy is. And I’ll even add—it doesn’t matter how robust and insightful your analytics and reporting engine are.  

There’s no way around it: Astute portfolio planning and decision making require dependable data.  

“Yes, yes, we know,” you say. “That’s why we put so much time into making sure the data is correct.” Research we conducted with over 100 institutional investors over the past 15 years indicated that investment teams spend 40% of their time preparing data, as opposed to using the data for decision making—the job they are paid to do. Shouldn’t investors’ time primarily be spent—you know—investing?

We certainly think so.

Introducing: Ledger by SEI Novus

Designed for the asset owner of our times, Ledger is a functionality embedded in SEI Novus’ traditional data and analytics platform for allocators, allowing institutional investors to confidently sit on a fully reconciled Investment Book of Records (IBOR) through enhanced shadow accounting technology. Finally, a user-friendly way to assert control over your IBOR.

Ledger by SEI Novus enhances classic shadow accounting practices in four ways:

  • Connective: Instead of replicating data in parallel to what the custodian is booking, and then checking at period end, why not connect with the custodian records directly every day, ingest data via APIs, and go from there? You get your own version of the transactions, and if the data is wrong, you can point to the custodian directly, thus correcting the data at the source.
  • Transparent: With more data, complexity grows exponentially. Given the strict financial compliance requirements, being able to pinpoint who changed, which number, from what figure, into which, when, and how is of paramount importance. And after a series of changes, it is not uncommon to wish you could roll back time and see what the portfolio looked like on a certain day in the past. With Ledger, portfolio data is created by stacking changes on top of each other, allowing for rigorous audit trails and time travel to past versions.
  • Comprehensive: Once Ledger by SEI Novus identifies that look-through transparency is available for a given investment, you’ll have that transparency at your fingertips. Explore exposures, attribution, and risk in an accessible format, enriched by market data—across all asset classes. For asset owners that are driven by ESG considerations and think that fiduciary duties involve making sense of all transparency available, this can be a game-changing advantage.
  • Workflow: Not all transactions need the same level of attention; the world would be a very inefficient place if that were the case. With Ledger by SEI Novus, you can assign tiered responsibility to different individuals in the teams. For example, perhaps only transactions above $1,000,000 need to be approved by the head of operations.  

An IBOR, however, is not an Accounting Book of Record (ABOR), required by some investors. You can derive an IBOR from an ABOR, but the inverse is not true.

Can I get an ABOR with that IBOR? 

Possessing a fully reconciled IBOR means that for every investment account and period you can confidently explain the beginning of period balance (BOP Balance), all transactions affecting the account in the period, and the P&L during the same; these items add up to equal your end of period balance.

EOP Balance = BOP Balance + Transactions + P&L

This is enough for portfolio intelligence, as most return and performance attribution metrics can be derived from the above. However, this may not be enough for a fully granular, general ledger-based set of accounting books. Creating an ABOR matters in situations such as the calculation of tax lots, or any other workflows requiring deep accounting information.  

An IBOR can be created from an ABOR, because the former is a reduction of the latter. Think of an IBOR as a fully reconciled left side of the balance sheet (the asset side). Because of that, it does not make sense for any organization to construct ABORs and IBORs via two different software packages, as this will inevitably lead to inconsistencies. While logical in principle, this paradigm is often neglected. Middle- and back-office teams endow themselves with accounting software to maintain their ABORs, while front-office teams tend to build their IBORs with self-made software. This is symptomatic of the "great divide" (in terms of teams and culture) that often exists between middle-/back-office teams and front-office teams, leading to technological chaos.    

Constructing an Accounting Book of Record with SEI Novus

While Ledger by SEI Novus is a functionality aimed at constructing IBORs, SEI Novus offers fully outsourced accounting services through the investment processing capabilities of SEI, leading to the construction of a full ABOR. In November 2021, Novus was acquired by SEI, a provider of technology and investment solutions that connect the financial services industry. Sidenote: This was a truly exciting milestone. After spending years stressing the importance of portfolio intelligence, we now have greater scale and reach that will help ensure continuous investment in cutting-edge analytics for asset owners and buy-side firms.  

SEI offers enchanced CIO capabilities
Click for more detail on SEI's ECIO offering

SEI Novus, including our Ledger functionality, is part of SEI’s Enhanced Chief Investment Officer (ECIO) offering, a formidable bundle of services that includes middle-to-back-office solutions including fund administration, fund accounting, and operations; this is alongside SEI Novus’ suite of performance measurement, reporting, attribution, and look-through analysis via a single point of access. Because SEI provides robust investment processing and shadow accounting services, the ECIO Platform can truly connect the back, middle, and front offices, ushering in a new era for combined investment processing and analytics for asset owners.

Whether opting for a fully outsourced back office, or implementing new technology in house, let's resolve to protect our precious time from being swallowed up in the redundancies of double booking transactions just to ensure our basic data is accurate. Let's use systems that enable us to make investment decisions with confidence.

Information provided by SEI through its affiliates and subsidiaries. This information is for educational purposes only and should not be considered investment advice. The strategies discussed herein are complex and are not suitable for all investors.

Charts included herein are for illustrative purpose only. Information provided by SEI through its affiliates and subsidiaries. This information is for educational purposes only and should not be considered investment advice. The strategies discussed herein are complex and are not suitable for all investors.

SEI Novus is not an investment advisor, broker dealer, or financial institution and does not offer or provide advice regarding analysis of securities or effecting transactions in securities.  SEI Novus does not endorse or promote any mentioned investment management firm or any fund managed by any such firm.  The purpose of the information herein is to demonstrate the capabilities of the SEI Novus Platform.

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Our team of world-class client management analysts will introduce you to our product, tailoring the conversation to your specific needs and interests.