Look-through is a simple concept that requires considerable effort from fund managers and sponsors, which is why we have had suggestions recently about relaxing the requirement in Solvency II, the rules where this issue first came to prominence. Nonetheless, a lot has been achieved by the industry in terms of adopting standards and processes that have provided sustainable solutions to what once appeared as an insurmountable challenge. In fact, we observe a new impetus behind look-through as a business enabler, with many investors seeing it as a requirement before handing over their money; at the same time, look-through is widely accepted in other regulations as a key element in providing the market with the information it needs about investments. We reckon the catalysts for the renewed embrace of look-through come under three key headings of regulatory/ customer demand, standardisation and data quality.
It is clear that transparency remains an ongoing theme in the regulatory environment, and regulations such as Solvency II and MiFID II have so far been the primary driver for the standardisation and adoption of look-through. Whatever short-term suggestion about toning down the look-through requirement, it is important to remember that regulatory transparency has no end – the desire among policymakers for clients to be able to understand where they are putting their money will keep look-through in the spotlight.
From a client perspective, improved risk management processes mean that look-through is more in demand. Why so? For the simple reason that increasing the availability of more detailed information on assets allows investors to manage risk factors across portfolios better and ultimately make stronger decisions on asset allocation, portfolio construction and manager selection.
Changing customer demands and expectations is another crucial issue, none more so than in socially responsible and sustainable investing. Look-through enables accurate Environmental, Social and Governance (ESG) scoring on funds, allowing ever more socially conscious investors to screen investments on a set of environmental (including carbon), social and good governance criteria.
The success of the industry in finding ways to standardise the approach to look-through data collection means the relevant templates have become widely used for a range of purposes on top of pure regulatory reporting. With the TPT as the de facto standard across most of Europe for asset look-through, and costs and charges look-through for MiFID II and governance requirements standardised in the EMT, these templates are being repurposed beyond regulation to feed risk management and ESG scoring engines. Moreover, as look-through is a standard component in the TPT and EMT, more and more fund managers are supplying this information without prompting.
More sophisticated investors are now taking data availability as a given and are increasingly becoming more demanding on quality, with the idea of quality embracing full look-through disclosure. What were tick-the-box responses to look-through are no longer sufficient for winning extra business – conversely, having complete look-through data on a fund is an enabler to gaining traction in the market.
To achieve full data quality with look-through, there needs to be quality assurance at every stage of the reporting process (acquisition, standardisation and proofing). With this task being pushed further up the supply chain, there’s a renewed onus on the source of the data (the end fund manager) taking ownership of, and accountability for, this task. A fund’s data distribution strategy, making sure that a consistent view of the data is provided to the market, also has a role to play – ensuring the right data, in the correct format, ends up in the right hands is the essence of data quality.
Overall, there is no doubt that achieving look through is a challenge for asset managers (although using a data exchange such as Silverfinch is, we think, the easiest way to succeed in this task). Moreover, while it may have started as a regulatory requirement, providing look-through has now become a base standard for many investors, with the result that providing this data is a prerequisite for gaining new market share, and indeed holding onto existing clients. Look-through is here to stay.