MANAGED ACCOUNT REBALANCING SERVICE MARS - Automating the Portfolio Manufacturing Process Considering Risk/Return, Tradeoffs and Taxes
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MANAGED ACCOUNT REBALANCING SERVICE [MARS] Automating the Portfolio Manufacturing Process Considering Risk/Return, Tradeoffs and Taxes
FEB-3-2015 Introduction The wealth management industry is rapidly evolving towards more and more customi- zation. As such, there is a need in the mar- ketplace for operational efficiencies that enable the manager to meet the demands of the high net worth client profitably. MARS provides a complete “production” infrastructure for the private banking market by automating key parts of the overall man- agement process. MARS ties together separately managed databases such as; portfolio accounting, customer relationship systems, risk modeling, tax optimization, trade order management and other report- ing databases into one seamless process rather than stand-alone databases that don’t communicate efficiently. The service is flexible and built to accommodate individual client company preferences. We believe this infrastructure capacity is a powerful tool to enhance investment processes and position your firm for growth. MARS is run off Northfield’s portfolio rebal- ancing service, which was developed in 1996. Today, Northfield is considered a pio- neer in the tax exempt and taxable portfolio management business; its Open Optimizer and related risk models that comprise Northfield’s portfolio rebalancing service are already deployed in a large number of lead- ing financial institutions world-wide. Northfield has partnered with SoftPak Financial Systems (“SoftPak”), who installs and main- tains the MARS interfaces to client company internal systems. SoftPak specializes in the de- sign and development of analytical tools, database applications and client-server/web-based solutions for the investment management industry.
MARS Data and Workflow Diagram
Users
Inputs MARS GUI Outputs
Holdings Trades
MARS Analytics
Tax Lots Positions
Investment Activity
Interface
Interface
Objectives
Northfield Balances
Alphas Portfolio Risk Reports
Model Portfolios Rebalancing
Service Gain/Loss
Constraints Summaries
Benchmarks Portfolio Transi-
tion Analyses
Portfolio Northfield Risk Reporting
Accounting Model Data Systems
and Customer Updated Databases
Relationship Monthly
Management
System
Databases
Investment Strategy MARS integrates each part of the portfolio manufacturing process. Beginning with account data and client specific mandates, MARS aggregates such data from a com- pany’s portfolio accounting and customer relationship systems: holdings, tax lots/cost basis, buy lists, model portfolios, constraints, benchmarks, risk model data and more. With this collection of data and analytics, each company‘s investment strategies are leveraged operationally as MARS provides user driven output that ties directly into trade order management and other report- ing systems integral to completing the wealth management workflow. The MARS computation engine enables the User to trade off risk, return and taxes at the individual portfolio and/or the aggre- gate account level depending upon com- pany preference. In addition, MARS can be configured to fit your company’s investment process, i.e.; central- ized, decentralized or somewhere in between, by limiting the roles of each user based upon company preference. The ability to integrate robust portfolio analytics and account customization with operational scalability is a competitive advantage for Managers in the private banking market today.
The Portfolio Manufacturing Process
Account
Established
Build Build
Asset Model
Investment Backtesting
Allocation Portfolios
Strategy
Client Security
Reporting Selection
Performance Risk
Attribution Decomposition
Performance Portfolio Trade Trade
Measurement Accounting Execution Compliance
MARS Utility Overview
Portfolio Construction and Tax Management
The service provides users with ability to identify, measure and control risk before, during and
after the rebalancing process.
With Northfield’s open tax optimizer, any structured risk model may be used to trade off the
benefits of risk, return and taxes across client portfolios.
Client specific tax information may be captured and utilized during the rebalancing of portfolios;
including wash sales, short/long term tax rates, year-to-date realized gain/loss information
(including non-managed assets) and maximum limits on capital gains.
Rebalancing templates offer users the ability to fulfill client directed mandates (harvest losses,
harvest gains, cash withdrawals, etc.) in a tax efficient manner while taking client specific re-
strictions into consideration.
The service provides the flexibility to apply HIFO, LIFO, FIFO or best tax lot selection when re-
balancing taxable portfolios.
Allows for tax optimized portfolios by considering the tax implications in every trade.
Portfolio transitioning template allows for ‘tax sensitivity’ analysis where multiple, optimal port-
folios may be created for the same account for different levels of risk. This allows users to view
different scenarios before trading.
Risk Management
Using Northfield or any structured risk model, the service provides for detailed risk analysis
(decomposition) which may expose unintended bets within a single portfolio or across a group
of portfolios. This effectively transforms implicit assumptions into explicit decisions.
Empowers asset management firms with automated tools for monitoring and managing risk
across multiple portfolios.
Northfield’s optional Everything Everywhere (EE) Risk Model includes security level coverage for
all asset classes including optional coverage of mutual funds, hedge funds, ETFs, US municipal
bonds, US collateralized instruments and derivatives that may be used to structure private
wealth portfolios.
Model Management
The service provides users with ability to load, maintain and manage their own proprietary
model portfolios with no limit on the number of models or holdings.
Model portfolio information may be loaded as part of an automated process or created manually
within the application. Model portfolios may be set to be either static (loaded once a day) or dy-
namic (loaded intra-day to reflect price changes in underlying constituents).
Single strategy models may be easily blended together to create multi-style model portfolios,
with the option to apply position and sleeve level tolerances.
Client portfolios may be linked ‘on the fly’ with single or multi strategy model portfolios, effec-
tively minimizing dispersion and drift among all managed accounts.
Security and Compliance
MARS is an N tier client server hosted service with web features.
The service provides application level security to allow for user access controls and the monitor-
ing of all user activity.
Role level permissioning granted to groups of users provides authorization levels to control ac-
cess and functionality.
The service provides users with the ability to apply account specific restrictions as hard con-
straints during the rebalancing process.
Customized Reporting
With complete transparency to all of the information stored in the MARS database, clients can
either leverage the set of reports that are provided with the technology or build their own set of
reports using any desirable technology.
Built around Crystal Reports, the ‘standard’ set of reports include both individual and aggregate
level reports that maybe saved in a variety of formats; including PDF, HTML, XLS, CSV, XML.
MARS Templates
Step 1: MARS Log-in and Data Load
Acquire applicable data from portfolio accounting and customer relationship database systems, including:
Holdings Proprietary research
Market data Risk model
User Login
Managed Account
Rebalancing Service
Select Account
Mars Settings– Project Level [ Project = 11734786 ]
Step 2: Define Account Investment Objectives and Constraints
Select Benchmark
Select benchmark (model portfolio) tied to selected account, and select other applicable inputs to the
rebalancing process; including alpha forecasts, account level constraints (do not buy, do not sell, no to-
bacco, etc).
Mars Settings – Project Level [ Project = 11734786 ]
Benchmark
Growth Large Cap Growth
SPX S&P 500 Index
Value Large Cap Value
Select Risk Model
Mars Settings– Project Level [ Project = 11734786 ]
Risk Model Fundopt Northfield US Fundamental
Aegis BARRA Risk Model
EE Northfield EE Risk Model
Global Northfield Global Risk Model
APT Northfield Macroeconomic (APT)
US Country Northfield US Country
Fundopt Northfield US Fundamental
Select other Account Level Constraints (risk aversion, tax situation, etc.)
Mars Settings– Project Level [ Project = 11734786 ]
Portfolio Construction- “What If ” Optimization
Step 3: Determine the optimal investment strategy for the Client
taking tax costs into account:
Initial Tracking Error
In ‘what-if’ optimization, one can plot predicted tracking errors against costs
As one moves the initial portfolio closer to its benchmark or model account, you can measure the trade
offs between risk reduction and tax cost.
Tracking Error
Tax Cost %Step 4: Portfolio Activity
Incorporated into the application are a number of utilities and templates that make routine tasks like
handling cash withdrawals, harvesting of gains/losses and creating batches of accounts quick and
easy.
Cash Withdrawal
Cash Withdrawal Utility
Automate routine tasks such as cash withdraw-
als and gain/loss harvesting requests
Loss Harvesting
Loss Harvesting UtilityStep 5: Reports
With a number of pre-defined reports, asset management firms can view both the initial and the opti-
mal portfolios at either the aggregate or individual account level; before submitting trades to any trade
order management system. Note: reports can be displayed in both graphical and tabular formats:
Initial Share Lot Summary Report
Aggregate Reports – (2.9.2) - (MARS)
Compare initial and optimal results – at either the aggregate or
individual account levels
Optimize Portfolio and Review Reports
Aggregate Reports – (2.9.2) - (MARS)Review suggested trades-canceling where desired
Aggregate Reports – (2.9.2) - (MARS) [Accounts]
...and then load the trade data into any trade order management system.
Trade File
Aggregate Reports – (2.9.2) - (MARS) [Trade File]Step 6: Batch Processing– the utility that scales the investment process handling
hundreds to thousands of accounts:
Define the accounts of a given batch using various filters
Batch Creation Utility
Repeat process for accounts with similar account characteristics
Mars (Risk Based) - (2.9.2) - (Mars) - [SP 500]Northfield Overview and MARS Strategic Partner
Founded in 1985, Northfield is a market leader in developing
open, analytical models to identify, measure and control risk
for the investment management industry. These risk models
cover most marketable securities traded world-wide. Based
upon sound investment theory, Northfield’s services have
stood the test of time from users within the global institu-
tional investment community. The risk models are broken
down by geography – global, regional or country, and applied by users of our
portfolio rebalancing service. Both our analytical tools and risk models that com-
prise the rebalancing service are completely transparent which allows our cli-
ents access to all factor data and underlying assumptions.
To compliment our core rebalancing service, we offer our clients an asset allo-
cation service, style analysis service, manager search and performance attribu-
tion services. These offerings target a traditional user base of institutional
money managers, plan sponsors, pension consultants and high net worth family
advisors.
These services are considered “state of the art” analytical solutions to assist in
asset class selection and determining the source of investment performance.
Northfield includes tax optimization within the portfolio rebalancing service for
Managers who handle taxable, managed accounts. Northfield’s tax optimizer
was launched in 1996 and is considered one of the best analytical tools avail-
able for private wealth managers. Multiple portfolio batch processing combined
with Northfield’s portfolio rebalancing service is a powerful solution for auto-
mating the rebalancing of hundreds to thousands of taxable accounts. Invest-
ment managers can use the Northfield portfolio rebalancing service to adopt a
“portfolio manufacturing” process that allows for both improved operating effi-
ciency and investment quality.
With over 200 clients worldwide with offices in Boston, London and Tokyo,
Northfield strives to be the preferred partner for money managers.
While Northfield is responsible for MARS marketing and investment related cli-
ent support, our partner, SoftPak Financial Systems in Boston, MA is responsi-
ble for MARS installations and ongoing maintenance. SoftPak specializes in pro-
viding information technology (“IT”) consulting to the investment management
industry. The SoftPak mission, in coordination with Northfield, is to insure that the
MARS application integrates seamlessly with our clients’ existing IT infrastructures.Growing
Growing
number ofmanaged
number of managedaccounts
accounts
Same
Same
number ofhours
number of hoursinina aday
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Same
Same
rebalancing process
rebalancing process
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Investment Analytics Customization Scalability
MARS
In the managed account industry, everyone shares a common objective – to
see that the investors' portfolio grows in value. Our objective is to ensure
that your profits do not get lost along the way.
For more information, please contact your Northfield Sales Representative
or Northfield Sales at 617.208.2050, sales@northinfo.com.NORTH AMERICA EUROPE ASIA
Northfield Information Services, Inc. Northfield Information Services UK Ltd. Northfield Information Services Asia Ltd.
77 North Washington St. 2-6 Boundary Row Level 27
9th Floor London, SE1 8HP Shiroyama Trust Tower
Boston, Massachusetts 4-3-1 Toranomon
02114 Sales & Support: +44 (0) 20 3714-4130 Minato-ku
USA Tokyo, 105-6027
Sales: +1 617-208-2050 Sales: +81 (3) 5403-4655
Support: +1 617-208-2080 Fax: +81 (3) 5403-4646
Headquarters: +1 617-451-2222
Fax: +1 617-451-2122
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