Architass Operational Environment - Essay Example

?Executive Summary Architas is a fund management company, having global investments. As of this moment, it manages over ?12 billion in assets. They have a great investment history but just like any other investment company, they have the same issues, transparency. Although their multi manager business model has served them well and returns have grown since their inception in 2008, they can offer more to their clients by improving visibility. On the 4V’s scale, the company scores low, which doesn’t overshadow its strong points in variability, variety and volume. Being low on variability is good for an investment company. Their multi-level investment model has been their strength of their operations. The diversification they offer to their investor is definitely top notch. The highlight of their operational management reflects in their company returns and growth. But the same experience of great return can be coupled with improved client communication. To make sure they offer the best fund management service, they can improve their visibility and information they give to the client. Certain recommendation have been suggested in this paper for improving client-manager relationship. They can certainly improve their customer retention and attract new businesses. They can even improve the information they offer on their website. Contents Introduction and Business Context 3 Operations overview (conceptual analysis) 4 Performance Objectives – order qualifiers and winners 6 A selection of key OM concepts applied 7 Analysis of “failing” process studied – “the operations problem” 13 Improvement Plan 15 Implementation plan 17 Conclusion 18 References 20 Introduction and Business Context Architas is an investment corporate, offering best investment pools to clients. Their theme is to make sure client’s investments go in the best fund. Not every investor is that aware of investment and finance world, that is where Architas offers their services. The have a team of professional investment managers, at the top of their game. They handle different fund genres and specialize in their particular niche. So the business model is very simple, investors invest in the funds offered by Architas, and fund managers manage client’s investments. Delivering returns and controlling risks are two primary tools they excel in. Architas is a part of the global AXA group. Architas was founded in 2008 to meet the ever changing needs of today’s investors. The volume of assets advised and managed at Architas exceeds ?12.1 billion (Architas, 2013). The AXA group is a truly global investment company, employing 160,000 employees worldwide. Operations overview (conceptual analysis) System model Every company has its own custom business model, cut to fit in its special needs. Architas is no exception; they incorporate a strategy they call the ‘multi-manager investing’, from a client’s perspective, a reverse funnel in terms of its operations. What it does is, offers a client access to different investment managers through just one product. ‘Fund of funds’ is a term widely used in investment world, but here it truly delivers what it’s supposed to; offering a mix of investment managers to clients as a single solution while keeping the costs low. Illustration of fund of funds portfolio1 4 V’s Analysis – the operational environment Architas’s operational environment in terms of 4 V’s of operations give a clear picture as to how they handle their operations and how they can improve them. In terms of Volume, they have a huge investment portfolio. They can’t be compared with manufacturing industry, they have soft products, fund management and in terms of fund volume, they are huge. Variety regarding an investment company like Architas is also plentiful. There are huge number of options in terms of funds and other financial tools. Keeping expectations grounded in reality, what Architas offers to its clients is a huge array of bonds, equities, money market tools, and different collage of portfolios. Clients can choose their style of investment/fund they want to put their money in. There is a difference between fund managements. Some offer low return some high but at the cost of the risk. The basic principle of investment; the higher the risk the higher the return implies the same here. Variation analysis doesn’t seem to produce results similar to those of volume and variety. A financial company doesn’t need to vary and its lack of variation is in fact an investment strategy. They don’t engage in unnecessary risks and business adventures. Visibility is the only real drawback that the 4V’s analysis reveals. Being low on variation might not be a bad strategy for a fund management company but being low on visibility is definitely something Architas needs to work on. Although there is always the matter of privacy and corporate secrets but the analysis does reveal Architas’s poor visibility. Visibility refers to interactional elements of a service that are visible to the customer (Mahadevan, 2010). Performance Objectives – order qualifiers and winners The main performance objective of the company is to offer best return possible to client while minimizing risk. Three business pillars have been identified as the foundations on which the company stands on. Pillar 1 and 2 pertain to capital requirements and adherence to FSA. The pillar 3 of the company spells out its risk exposure and risk assessment process. Pillar 1 capital picture has been shows in the table below. Pillar 1 Capital Resources2 This model is considered an order qualifier for the company. In fact the company is required to hold more capital than the one shown above in lieu of Pillar 2. The whole business model revolves around efficient risk management. The better they manage risk the more lucrative results they offer to their clients. The risk management system is based not solely for Architas specific needs, the company is a part of the AXA group, and hence follows the group risk management and polices. Architas does get its own risk management flexibility that is suited to an investment entity. The core of operations management at Architas rests on risk management, its identification and assessment. The risks are identified at functional level, with categorical risk classes. A selection of key OM concepts applied Risk assessment is the first step in operations management at Architas. A risk is assessed based on its frequency or occurrence and its impact severity. This assessment is done in context of internal controls. For instance, a is assessed how much it’s a particular risk how much it impacts the internal environment of the company and how frequently it occurs. One advantage of this risk layout is that the company gets to see if the affect (exposure) is inherent risk or controlled risk. Capacity Planning The team at Architas considers it a challenge to identify and assess a risk, the real challenge is to do this job at the functional level, before the risk manifests itself and becomes a nuisance. To make sure this process if handled efficiently, a report on top company risks is compiled and sent for review for a particular time, meaning, at a particular point in time the company might be facing different risks as compared to a quarter later or earlier. This helps in pin pointing the risks with respect to time frame. Other than being company specific in terms of identifying opportunities and assessing risk, a companywide comparison is also performed. This helps in identifying various trends and themes. An aggregate of the company risk is compiled especially for this purpose as it gives an incentive to average out the risks, and a meaningful comparison can be made. The report made of the risk aggregate and top most company risks identified is sent to both the Management Committee and Board, and Risks and Operations Committee, to be reviewed. Risks identified regarding company’s operations and business hold the most importance. They govern the whole business design, the company cannot rule these out when shaping future plans. Key operational risks identified at Architas include (Architas-MM, 2013) ; Breach of regulation legislation Deteriorating employee relations and failure to adhere to employment law System failure and interruption in business Blunders in dealing and fund management Failure to take action in response to a change in external business environment Incorrect/inappropriate payments causing losses Violating investment guidelines Poor return on investment for a longer period of time that leads to loss of clients or failure to attract new business Outsourced party or vendor fails Fraud (both external and internal) After these primary risks, there are other non-key operational risks that that company needs to always juggle them. For instance the inherent risk of investing money and whenever taking financial liabilities or acquiring assets, especially the financial assets. Liquidity Risk An investment company like Architas needs to be aware of how much liquid cash they possess and how much they need. Liquidity is extremely important, especially for a financial company, the clients and credit rating agencies look at liquidity related ratios, like quick, cash ratio to make sure the company has enough cash to deal with their liabilities or contingencies. Due to its efficient operation planning, especially for pillar 1 and pillar2, Architas hold huge amounts of cash to meet its own measures that is why there hasn’t been a significant liquidity problem. Credit Risk Credit risk is inherent in financial liabilities, the probability of counterparty defaulting in a financial contract arises credit risk. It is inherent in both investment and noninvestment assets. For Architas, this risk is more relevant sales debtors on AMM balance sheet. Market Risk The movement of markets generate market risk and is directly affected by instruments such as bonds, equity prices, commodities and foreign exchange. Architas’s operational management team hires the most qualified fund managers and investment experts to make sure this risk remains under control and the company is in fact proactive in dealing with them. The direct impact of this risk at Architas is the box holdings. Operational strategy here is to keep these holdings to a minimum level. To deal with these market risks, special operational strategy has been devised at Architas. As mentioned in the introduction, Architas uses multi asset and multi-manager investing that gives them the following benefit in dealing with the market risks through diversification; Diversification of Funds across the globe3 Even the money market has an inherent risk of fluctuating interest rates. They can go even lower than the inflation rate. The image above shows how the funds have been diversified across the globe to meet this challenge. Only 1.82% has been invested in money markets as the return on these instruments are not hefty. They are considered relatively safer. Equities hold the most share as 43.55% of funds are invested in equities. And they are not confined to a specific region. Diversification in equities is the key to real profits. No stock can be evergreen lucrative that is why Architas spreads its equities investments to UK, Asia Pacific, North America and other global emerging markets. The geographical spread of overall investments has been operationalized as; Overall investment spread4 The real operational skill at Architas is shown in their fund managers, how they have handpicked each one of them to make sure that diversification pays in real monitory term as well as making the best of the opportunities available around the globe. Following figure shows the real value of diversification in fund managers at Architas. This holds the key for operational efficiency at the company; Diversification in terms of Investment Managers5 Architas is very careful investing and diversifying. The benefits to Architas, as a direct result of this investment spread, include better risk management. Their portfolio construction, in depth research and the blend of managers they hold allows them to better manage this. Through research is also a gift of this spread; regional specific research is not possible when the whole brain sits in another country. For this reason, the diversified machinery of the company better handles the whole research better than a centralized body. The purpose of this paper is to locate an issue in Architas’s operations. Diversification is considered a way to lower risks. According to many following ethics in investment means lower returns (Richardson, 2002), but this is not the case with the proposition this paper has. The only problem identified here is low visibility which is also following investment ethics. Analysis of “failing” process studied – “the operations problem” Problem in Architas operations pertains to their low visibility, in other words, the clients don’t get to see the nuts and bolts of their investments. On one hand it serves them really well as confidentiality lets the corporate try those stunts that they can’t otherwise. Every corporate has its own space where they don’t have publicize everything and that gives them the liberty to stretch their limits. However there are certain drawbacks that Architas faces pertaining to their low visibility. The chart above presented how the funds have been spread all across the globe, but in the wake of financial changes that have drastically effect financial markets of the world, has there been any significant change in the investment portfolio at Architas? If there has been, are the clients aware of that? Taking a closer look at the operations, shows that the key to their investment success so far has been in efficient outsourcing or what they term as multi manager investments. But we need to compare their strategy with the costs they bear and ultimately the costs that their clients bear. The problem with low visibility is that people might look at their annual reports or consult some local broker or investor and ask them to advise if they should invest in Architas or not. Based on whatever experience they have, they will shed their wisdom gems. That is not an informed decision. Their asset allocation for their passive funds has remained somewhat like this; Asset allocation at Architas6 The number of holdings for this sort of fund spread is 32, a total of 73.31%. For a passive fund spread the performance here seems impressive. However when the same diversification is taken for the liquid assets and profits, there has been a drop in their growth; Growth in liquidity7 The reason for this drop is liquidity growth might not be pinpointed as sometimes losing liquid cash is essential for a financial entity, so as to not hold unnecessary liquidity. But do the clients know how their liquidity is being managed? Clients need to see the whole investment process and asset allocation. They need to know if funds have been shaped in a certain way, what philosophy governs it? Investor is interested in modelling the value of securities in his market and his investment horizon (Meucci, 2009). The more visibility the company offers the clients, the better. The problem with the mouth-watering diversification at Architas is more than just the visibility. The fee structure is also not fully described the way returns and glorified risk mitigation is. For instance, are all investors being treated equally in regards with risk mitigation? Investors flock towards mutual funds as they offer the opportunity to get diversification without investing in a large portfolio (Peck, 2011). Architas gives that opportunity but is it giving the access to everyone under the same charges? Diversification is not an independent principle (CFA Level 1 Readings, 1996), assets are diversified to mitigate risk, that is the only rationale. Improvement Plan Interdependence of operations and lack of buffers necessitate smooth and efficient control (Wild, 2002). In lieu of the diversification offered, and the return that the investor gets there isn’t anything special about the company that jumps and grabs the investors. The best improvement plan, which they can even put it on their website is to offer CFA code of ethics regarding visibility. This will ensure that the company follows a set of strict guidelines and policies regarding investments and the communication with their investors. For instance, on their website, it is written that in Diversified Protector Funds, that; “Where an initial charge is imposed, an investor who cashes in their investment after a short period may not (even in the absence of a fall in the value of the relevant investments) get back the amount originally invested or may face the risk that the fund fails to meet its investment objective. The funds’ charges may also be higher than assumed” (www.architas-mm.com) According to the strictest code, an investment company cannot simply tell the client about extra charges without giving a reason for overcharging in the fine print. For their share price risk under the same investment they can offer more information on how they manage to protect the 70% of the highest share price when at the bottom they give reason that there is no guarantee as the investor might get a return less than their investment. It is only common to assume that share price and currency exchange movement is not in anyone’s control, but if the company offers 70% protection (as is offered in Architas Multi-Manager Diversified Protector 70 Fund (Protector 70), it should explain how does that protection work. This relates to operations because risk management and mitigation is the real operation of a financial company. Improvement here can improve client retention and attract more business. So using more information dissemination and phrases on their website like, more information is provided to the clients, as a part of the client–manager relationship will definitely improve their visibility. Anticipated implementation problems There can be a backlash from fund managers as they have been used to this privacy and enjoying their liberty to play with the funds. For instance, if a fund manager’s commission is based on the return he earns on the fund, why wouldn’t he be willing to risk everything? Looking for long shots and high risk investment in the hopes of scoring a big number. If transparency and visibility is improved such fund managers will definitely protest. Moreover, there will also be a conflict within the organization, as there needs to be a wall between the research side and the sell side of the investment company. If visibility is pursued without keeping track of company’s interest and market ethics, there can be chaos in terms of violation of code of ethics and investment guidelines. Implementation plan Instead of putting everything into sight, making all walls transparent, Architas needs to first work on their own code. If they can’t develop their company specific code of conduct, they can adopt CFA’s code of ethics. Within the whole investment arsenal, they need to specify which aspects of investment strategy and pricing they need to make visible. This is not a short term plan, as writing a company specific code of investment ethics will take time and will need real time amendments in response to changes in the market. First the contracts need to be completed, only then they will be able to pull out of the whole web of diversification and out it intense markets. It might sound the reverse of diversification and probably seem threatening but it offers great opportunity to intensify the research and offer greater transparency. The general plan is to curb down the region spread of investment. Going global does make sense but it doesn’t mean that they have to invest in markets that they probably can’t handle. Architas uses outsourced tools for managing their funds but Conclusion Clients always prefer more visibility, transparency over less. They need to know if they have shaped their portfolio, has it been done in their best interest or not. Only putting faith in a brand name such as Architas is not enough. Clients are happy when they can see the whole process through to the end. Moreover, if there is such an opportunity where equity buying in Japan will give good returns, won’t the people in North America who are clients of Architas be at a disadvantage? If they improve visibility of their investment world, clients and investors will have more trust in their investment decisions. They will know the reasons if a certain security costs more or less, and the reason for its extra cost. Architas is a successful investment and fund management company by any standards. It is very hard to find out flaws and loopholes in their operations. Just like banks and other big investment names, the loopholes and flaws in a company are not revealed until they commit such a blunder that the press gets all over them and everything gets exposed. Then a certain fund manager in Singapore shows up as the one guilty of trading securities against portfolio guidelines. For these reasons, it is advised to Architas that they improve their visibility to the public and to their clients. Complete information, in reasonable form is mandatory for the clients. If implemented, it will serve the company both in the short and long term. References CFA., 1996. CFA Level 1 Candidate Readings: Ethical and professional standards: Investment tools. Association for Investment Management and Research. Mahadevan, B., 2010. Operations management: Theory and practice. Pearson Education India. Meucii, A., 2009. Risk and asset allocation. Springer. Richardson. B. J., 2002. Environmental regulation through financial organizations: Comparative perspectives on the industrialized nations. Kluwer Law International. Peck, S., 2011. Investment ethics. John Wiley and Sons. Wild, R., 2002. Essentials of operation management. Cengage Learning. Read More