In the current landscape investors and funds have made a pivot, but is it here to stay?
Twelve months ago, the idea of conducting operational due diligence (ODD) on a fund manager remotely would have been derided as sheer madness. The ability for investors to spot irregularities or non-compliance at managers will be severely compromised if ODD were to be conducted through a video link, people would have argued.
Now, virtual ODD is the new normal and will be for some time until the pandemic runs its course. After putting allocations on hold during the initial stages of COVID-19, institutions, fueled by the US equity market recovery in the summer, are now once again investing in fund managers. Portfolio BI recently held an online seminar — “Steering through Turbulent Waters” — exploring how the ODD model has evolved because of COVID-19.
A new working model
With the entire global asset management industry now overwhelmingly working from home (WFH), ODD teams have been forced to embrace technology.
Validating NAVs (net asset values) and verifying cash movements — activities once conducted in person and on-site by ODD teams — are now being performed online via screensharing. That said, some asset managers are understandably nervous about investors taking screenshots of proprietary data, and insist that NDAs be signed by clients ahead of them sharing this information online. However, the consensus is that asset managers have become increasingly transparent during the pandemic and are willing to disclose more information to ODD teams in the absence of being able to conduct physical meetings.
WFH also creates new risks. Outside of an office environment, employees are more vulnerable to cyber-attacks, especially if they are working off an unencrypted network or personal devices lacking VPNs and the protection of a company firewall. In a working from home set-up, people are also more likely to let their cyber-security guard slip, opening them up to potential phishing attacks. ODD teams want assurances that cyber-hygiene is being taken seriously by managers (i.e., staff are working on secure devices, using VPNs and cloud-based technology). Investors have also said that managers ought to be reviewing employees’ cyber-awareness by conducting email phishing tests.
investors also need to be confident that distributed workforces at asset managers have disaster recovery processes to handle disruption in their own places of residence, such as power outages. In fact, some investors recommend asset management employees be equipped with generators, additional batteries for laptop devices, and even satellite phones.
The pandemic has also called into question whether it is necessary for organizations to maintain expensive disaster recovery sites, especially as they have not been used during the pandemic and other past crises such as Hurricane Sandy and 9/11. It is probable that managers will look to downsize their disaster recovery sites moving forward.
The advantages of remote working
Despite the logistical challenges inherent with virtual ODD, there are some potential advantages.
Firstly, the absence of traveling and commuting has freed up resources at institutional investors, leading to organizational-wide efficiencies. The inability to travel also means it is easier for investors to speak with more members of the asset management team than they otherwise might have done. However, most investors and asset managers recognize that virtual ODD — while an adequate temporary solution given the extreme circumstances — is not as effective as a physical on-site visit.
Is virtual here to stay?
The longer-term effects of COVID-19 will be felt across the world of ODD. As and when the pandemic ends, ODD teams are likely to travel less frequently, not least because investors will need to find ways to keep their operating costs down.
As a result, ongoing monitoring of asset managers will likely stay virtual with checks conducted more regularly to compensate for the reduction in physical visits. However, experts agree that the initial ODD will continue to be conducted in person.