Evolutionary Awards – Prowess Investment Managers: LDI investing

Category: Evolution in investments

Describe your evolution:

The South African Liability-Driven Investment (“LDI”) market has historically been dominated by a small number of large, established players, and characterised by extremely high barriers to entry. However, over the past few years, Prowess Investments, a much smaller, black-owned manager has generated its own LDI capability, in the process developing the systems, adaptability and know-how to compete. The evolution we represent therefore, isn’t necessarily about a myriad of unique product features, but rather about the transformation inherent in a smaller, black-owned institution overcoming systemic challenges and rising to compete, and about what this example can mean for us and similar firms in building an inclusive South Africa.

The concept of LDI has been around for some time. It is centred on the philosophy that assets exist to fund future liabilities, and that consequently, assets should be managed such that their performance maximises the likelihood that those liabilities will be met. However, while the concept might appear straightforward, the LDI market itself is extremely difficult to penetrate for smaller firms given:

• The complexity of systems required to provide a rigorous and disciplined risk management framework used to accurately hedge the risk profile of liabilities.
• The consequent budgets required, whether for in-house system development or the adoption and adaptation of larger industry platforms which can cover R1milion or more annually.
• The depth of actuarial, portfolio management and system expertise required which can be scarce ad costly to source.
Despite these challenges, Prowess embarked on a journey to develop a specialised LDI capability. The resulting product has been a few years in the making but has resulted in a new and attractive offering that took on client assets for the first time at the end of 2023.

The following components have been fundamental to Prowess’ success in overcoming challenges and bringing its LDI offering to market:

1. Partnership with a valued client. Rand Mutual Assurance provided significant support and essential resources through an Enterprise and Supplier Development grant. This grant enabled Prowess to leverage additional expertise, invest in cutting-edge technology, and enhance its operational capabilities. This collaboration serves as a model for how strategic partnerships can drive innovation, support business growth, and promote transformation within the Investments industry.

2. Commitment to leveraging technology. This area can often be a challenge for smaller investment managers who often lack the budgets, or the depth of expertise required to compete with larger players. However, development of an in-house system allows the Prowess offering to combine strong risk management with the ability to adapt to each client’s specific profile.

3. Assembling an experienced and transformed Team of Investments professionals who have the requisite blend of specialised skills for LDI portfolio management including quantitative, actuarial, economics and portfolio management skills. The resulting team has the experience required in asset-liability management and in managing annuity books where advanced financial analysis and risk management expertise are at a premium. These skills are not easily available in the market, and we have been able source them and further build on them through upskilling.

Describe the impact your evolution has had in response to its identified challenges and targeted outcomes.

The evolution of Prowess’s LDI capability has had a profound impact on its ability to meet the challenges and achieve the targeted outcomes of effective LDI portfolio management.
The primary challenge was to develop a system that could manage the intricacies of LDI while providing accurate, reliable, and real-time data to inform investment decisions, in short, to deliver an offering highly comparable with best in breed in the market. Prowess has developed a comprehensive LDI portfolio management system that incorporates several advanced features and capabilities. The system is built using Python, providing robust and versatile scripting capabilities, and utilises MongoDB for efficient data storage and management. Its highly flexible framework is designed to easily accommodate additional instruments and analytics, ensuring scalability and adaptability. Additionally, the system includes specialised functionality to manage liability sub-components effectively.

Data integration is a key aspect of the system, with portfolio holdings and valuations sourced from our fund administrator to ensure accuracy and reliability. It also integrates market data, instrument static data, and credit data from various market participants, including the JSE and banks, providing a comprehensive data environment.

The system’s capabilities are enhanced through automation, which streamlines processes and minimises manual effort, thereby increasing efficiency. It offers advanced analytics for in-depth portfolio management and extensive customization options to tailor investment strategies to specific client and mandate requirements. The system supports and integrates multiple team members, facilitating collaborative portfolio management.

To maintain security and data integrity, the system performs daily database and file backups. Additionally, the Python code is maintained in a cloud repository, enhancing version control and accessibility.

By incorporating these features, Prowess’s LDI system offers a powerful, flexible, and secure solution for managing liability-driven investments, meeting the diverse needs of clients and ensuring superior investment outcomes.

The development of the system was premised on using Cloud technology which offers cost-effective scalability and flexibility, leveraging off open-source software and investing in modular systems to avoid overinvesting upfront.
Prowess is currently managing two LDI portfolios for an insurance company since November 2023. One of the portfolios has added 0.15% relative to the liability profile while the second portfolio is performing in close proximity to the liability profile. This follows a period of two years when we initially managed paper portfolios for the same liability profiles and were able to outperform the liability benchmark by 0.25% and 0.08% respectively.

The LDI strategy and system that Prowess manages is multifaced and can be customised to cater for a wide range of balance sheets and client types such as banking, defined benefit & defined contribution pension funds, corporates, SOE’s and mining companies.

The Prowess LDI journey highlights the value that can be unlocked when clients partner with small black-owned investment managers to enable them to enter new markets where they are able to demonstrate their expertise. It also illustrates the importance of leveraging technology to drive superior investment management and continued innovation and excellence in liability-driven investments.

Supporting Documentation >