TECHNOLOGY: ‘The purest form of alpha’

What are the key spending priorities for asset managers on technology? Fiona Rintoul asks four experts for their thoughts.

Cutting costs isn’t as sexy as finding a new investment strategy – but it may have a bigger impact on performance. This point is made by Idea Group’s managing director, Ian Lyall.

Many fintech firms and tech-heavy asset servicers would say that technology-led cost-cutting measures, such as fund automation, should be a priority for every investment manager.

Catherine Doherty, the chief executive of asset management consultancy Investit, suggests some investment firms may need a push from outside forces to improve their process, and in the area of data management, the push is already being felt.

This is the age of big data, after all, and Doherty makes the comment that for asset managers, it’s a case of evolve or die when it comes to gathering and analysing client information, though the notion could be applied more widely.

Daron Pearce, of BNY Mellon, points out that data is an asset manager’s most important asset. Better control of data can improve all aspects of an asset manager’s business, from performance to distribution, and so it’s no surprise that data management is where much of the industry’s technology spend is concentrated.

IAN LYALL, FOUNDER AND MANAGING DIRECTOR, IDEA GROUP

Are fund automation rates as high as they could be?
There is something of a market perception that rates aren’t high enough, but actually recent surveys of the ViaNova group saw 62% of respondent firms claiming automation rates of 80% or better. The challenge, though, is that this still leaves far too many firms below 60%, which, given that the technology, standards and market practices are all available, really leaves a ‘could do better’ in their end-of-year report cards.

However, what the industry doesn’t need is more working groups, or different solutions, as the answers are already there and being successfully used by many firms. The way forwards is very much around adoption of these existing solutions by the investment community.

To what extent should underlying investors be concerned?
Investors and investment managers should always be uncomfortable if unnecessary costs are impacting the performance of their vehicles. The well-known statement “the purest form of alpha is cost reduction” perhaps holds true here, as manual processing and associated errors often does influence the fund.

Traditionally, this has not been as exciting as, perhaps, finding a clever new investment strategy, but with the new regulatory burdens that are forcing financial firms to focus on the mundane, now is the perfect time to revisit these areas. The fund manager’s administrators need to be encouraged, and rewarded, for investing in these solutions then given a reasonable amount of time to recoup these costs, before anyone expects lower fees. This is a journey, but clearly one that makes absolute sense.

DARON PEARCE, CEO, GLOBAL FINANCIAL INSTITUTIONS, BNY MELLON ASSET SERVICING

What area of technology have you invested in most heavily over the past two to three years for fund clients?
We have invested in providing asset managers with far greater control over one of their most important assets – their data. Good data analysis adds value for asset managers, informing their investment decision-making, their product design and their distribution priorities.

We’re pioneering a number of new developments in investment decision-making. One example is a sentiment analysis solution from Heckyl Technologies, a London-based fintech. Heckyl scans social media and the internet to enable asset managers to assess sentiment towards the companies in their portfolios. The app provides a sentiment score on each company and we will be able to share this with clients in real time.

Which is one of the greatest technology challenges facing fund managers, and why?
Asset managers may face challenges when deciding which data streams to prioritise, particularly in the age of big data. The relevance of certain data streams will depend on whether [they] are analysing distribution, investment performance or business management.

Asset managers need to ensure they prioritise expenditure to minimise weaknesses and maximise returns. If an institution has excellent investment performance but poor distribution, data analytics resources should be channelled towards assessing this strategy. On the flipside, for institutions with excellent distribution, great investment performance but a very high cost base, analytics can help address business management challenges.

All asset managers can enhance their businesses by doing more with data. The key to success is early adoption of new technologies, ensuring best practice and maintaining a high rate of investment in technology.

CATHERINE DOHERTY, CHIEF EXECUTIVE, INVESTIT

In which areas of the fund management industry is technology not utilised enough?
I think the key to this lies in the word ‘industry’. Many investment firms do not see themselves as industrial, and so they have struggled with some areas of process improvement. One area where firms are particularly poor is on enforcing good data quality at the point of entry. Retail firms know accurate data entry is key and have barcodes on everything. Investment managers allow poor quality data entry on activities such as research, trading and corporate actions and then spend a fortune on processes and reconciliations to back-fill and repair that data. 

A second problem area is information about the end client. Investment management is usually intermediated, but that doesn’t prevent firms trying to discover more about the people buying and using their products. Investment products will be owned for many years, giving firms a huge opportunity to connect with end clients and become a trusted provider. In the battle to justify higher fees, a strong client servicing proposition may be every bit as powerful as active outperformance – and more reliable to deliver too. The technologies to do this are already in use by many other industries.

Do you see any signs of change?
Sometimes I fear that past performance may be a guide to future performance in the area of process improvement. Investment firms may not be culturally able to change this themselves – but perhaps a Blockchain-driven settlement disruptor will be able to drive it for them. When it comes to information about the client, it’s a case of evolve of die. There will be change, not all firms will do it and some firms will realise that too late.

OLIVIA VINDEN, PRINCIPAL AT ALPHA FMC

In which areas of the fund management industry is technology not utilised enough?
Fund management has the image of being less technologically advanced than other industries, but I think this is over-simplistic. Innovation is harder for financial services because it is highly regulated and this produces barriers to adoption. The regulatory environment also assigns roles to specific participants, meaning adoption of technologies requires participation by many members.

There are three large blocks of technology spending within a fund manager. Firstly, ‘Investments’ has seen greater technology investment, for example in trading latency or complex tools in the front office. Where technology can generate alpha, fund managers have been willing to invest. In ‘Distribution’, however, especially in the retail sector, the burden of regulatory compliance has been the enemy of innovation, especially where it is prescriptive about customer engagement methods. Finally, in ‘Operations’, technological advancements require co-operation between large numbers of participants, so we have seen most investment focused on projects like T2S.

Do you see any signs of change?
The huge explosion in fintechs and the proliferation of innovation panels at industry events suggest fund managers are adopting technology internally more rapidly. There are two primary drivers for this. Firstly, technology has advanced in such a way that it is much easier to adopt new tools and they can be easily integrated, leading the industry to adopt a more agile approach to implementing new technology and borrowing the best ideas from other industries. The second driver is cost pressure. Fund managers are looking at ways to reduce their distribution costs, for example via robo-advice, and their investment costs via more complex data analytics, and maybe in the future AI investing.

Major structural changes are on the horizon – changes that go way beyond the fund industry. Major changes are needed just to bring cash transfer into the digital world, but it requires co-ordination from governments, central banks and others. It is interesting to see how the fund management industry is collaborating externally, for example via the Blockchain projects currently being tested or via the expansion of utilities such as DTCC. These major infrastructure changes will bring the greatest benefits but are also the most difficult to bring about. We may yet see an Uber moment in distribution, but it seems a long way off in operations.

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