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The evolution of automation in investment management

- and the benefits for a global organization

Read this article and learn about:

  • The rise of the operating model
  • Disruption by technology
  • The evolution of automation
  • How automation can provide operational alpha throughout the investment management process
  • Why insourcing processes gives control of data
  • The ability to leverage new technology to stay competitive
 Age-Bakker-profile 
Age Bakker, Chief Operating Officer, Norges Bank Investment Management (NBIM)
 Kjell-Johan-Profile 
Kjell Johan Nordgard, Global Head of Systems and Data, Norges Bank Investment Management (NBIM)

How should investment managers position themselves to retain competitive edge in the future? At Norges Bank Investment Management (NBIM), we believe that a key element to this challenge will be an organisation’s ability to release the huge potential represented by the rapid evolution of Information Technology (IT). The keywords in this process are automation and information management.

The introduction of computer technology

Back in the early 1980’es, computer technology started in earnest to affect operational processes in many industries. Before this, computers were mostly something associated with universities, research institutes and the odd geeks. However, with the introduction of commercial mainframe machines like AS400, VAX and UNIVAC the landscape started to change, and when the PC a few years later started to become more or less part of common household furniture, most industries took to this new technology to get rid of paper-based processes.

The software industry has traditionally always lagged behind the hardware industry, especially when it comes to standards. In the financial industry, this created a setting where everybody developed their own local software. The systems and solutions developed were often aimed at resolving specific needs for different business users, hence operational models evolved with lots of legacy applications, some of which were integrated via some electronic data transfer, but most of them were operated by re-keying data. In addition to in-house IT and software development staff, financial institutions had to keep significant back office support teams in order to keep operations running. This “semi computerized” operational model was not only resource demanding in terms of development and technical maintenance, but also in terms of human operation and usage.

How should investment managers position themselves to retain competitive edge in the future? At NBIM, we believe the answer is the ability to leverage the huge potential represented by the rapid evolution of Information Technology (IT). The keywords are automation and information management. Age Bakker, Chief Operating Officer, and Kjell Johan Nordgard, Global Head of Systems and Data, Norges Bank Investment Management (NBIM)

Disruption by outsourcing

The systematic inefficiencies did not go unnoticed. The big service banks, already set up for large scale back office processing, observed that their clients were doing almost the same things, just with different systems and methods, and spotted a business opportunity. Simply put, the message was; “Let us do these repetitive tasks and allow you to focus on your core business, while cutting your costs.” Similarly, on the IT side, large IT hosting and servicing companies emerged in Eastern Europe and Asia where technical competence was cheap.

In the 90’ies and early 00’s, these trends led to outsourcing disrupting the market for investment management operational processing. While technology continued to evolve, the market for proper software solutions stayed fragmented and immature, imposing limitations on the possibilities for automation.

Disruption by technology 

Today, more than half way through the second decade of the new millennium, we believe a second disruption will hit the investment management community – driven by the evolution of technology. Unlike previously, the software industry now seems to keep pace with the hardware industry, and modern development tools have revolutionized the way software is created and deployed. New apps and widgets appear daily, and the opportunity of real-time connection and communication offers easy access anywhere, anytime.

As a result, electronically communicated and stored data and information have exploded, with the amount of available data created over the past two years equaling the total volume of all data accumulated up until two years ago. IT analyst Gartner predicts the number of internet-enabled devices to surpass 21 billion by 20201, and by 2030, 90% of the job market, as we know it today, will have disappeared2. Robots and algorithms will have replaced many of the tasks and responsibilities currently carried out by human beings, forcing industries to adapt and to find new business models and new roles for their employees. This trend has already disrupted many traditional industries like transportation, travel and accommodation, banking, and retail sales.

The investment management community has traditionally been very conservative, and thus been slow to adapt to new standards and methods. The most efficient way to drive acceptance and implementation of standards has been through legislation, i.e. “the whip” has proven a better enabler than “the carrot”. In many ways, this is strange, as the investment management sector should be the perfect case for standardization of processes through systems and technology. Most of the traded instruments are standard, reporting regulations and taxation across countries and regions are becoming more and more standardized, and messaging (through SWIFT) should be standard. There should be no case for inventing own technology and methods when it comes to integration and downstream processing of investment activities.

Removing the barriers for automation

Such systems are now becoming available, removing the traditional barriers for technological turnaround. Increasingly, investment managers will see potential for efficiency gains through in-house automation of tasks and processes. While outsourcing will remain an alternative for some, most investment managers will probably choose a combination of outsourcing and insourcing of their processes. The new alternatives brought to market by sophisticated messaging technology and comprehensive processing software, will offer more options and flexibility to this specific marketplace. This will allow investment managers to design operational models suitable for their specific needs, addressing which data and processes to be kept in-house versus what can be managed by others.

The journey towards automation at NBIM

At NBIM, the journey towards in-house automation started in 2010, when we wanted to replace a traditional asset-class oriented investment strategy with a cross-asset approach, focusing on our exposure to markets and companies in general rather than on the specific financing instruments. As our goal was (and still is) to achieve long-term investment performance through global investments, a cross-asset approach served our purpose better, which also meant we needed to take better control of our own data. We had to ensure that the investment teams had full and timely overview of positions, exposures, and opportunities across asset classes and markets at all times.

Increasingly, investment managers will see potential for efficiency gains through in-house automation of tasks and processes. Age Bakker, Chief Operating Officer, and Kjell Johan Nordgard, Global Head of Systems and Data, Norges Bank Investment Management (NBIM)

We took a close look at our operating model and found that it was not ideal for its purpose going forward. At the time, the systems landscape at NBIM was a scattered mix between home-grown applications, standard off-the-shelf products, and serviced solutions. Looking at the lower layers in the operational framework, IT infrastructure and application support was outsourced to different vendors. In the layer above, the custody, fund accounting, and trade processing areas were all outsourced to different service providers. Risk and performance reporting was delivered through a mix of standard in-house solutions and serviced solutions, supplemented by our in-house developed software. For the portfolio managers and traders in the Front Office, we had different solutions in place for the different asset classes, constituting a mix of serviced and self-managed standards and home-built software.

A consolidation process

We started the consolidation process on the IT side by merging the outsourcing contracts for IT infrastructure and application management under one vendor, thus creating economies of scale and one single point of responsibility. We then merged fund accounting and custody services to one global service provider. Simplifying the picture somewhat, this did not reduce the complications in our systems and processing landscape, where we also saw a clear need for consolidation. To reach our objectives, we decided to look for a cross-asset investment management platform that would fit our new investment strategy.

 Kjell-Journal-EDM

 Age-Bakker-Journal-EDM

“System consolidation, increased automation, standardized processing, and control of our own data have been the major achievements of transforming our operating model,” explain Kjell Johan Nordgard and Age Bakker, NBIM.

Choosing a new operating platform

After several iterations with the top system providers in the industry, NBIM bought the SimCorp Dimension platform in 2013 to support its Back and Middle Office processes. In February 2014, we went live with equities, and in January 2015, we added fixed income processing to the platform. With the full IBOR platform then in place, we started expanding into the Middle and Front Office areas, and in February 2016, we went live with SimCorp’s Asset Manager module for our fixed income portfolio managers. This journey will now continue with the rollout of the Asset Manager also to the equity investment teams, focusing on Middle Office reporting like performance, risk, and compliance.

What has been achieved?

So, is our world now a simpler place? In many ways – yes – but when you embark on a journey like this, you also accept that this is a journey without an end. There will probably always be room for improvements, for further enhancement, and tuning of the machine. However, we have achieved a much simpler systems architecture, having retired and decommissioned several internal applications as well as several serviced solutions. We have taken control of our own data; we have full ownership of all downstream activities, including trade processing and corporate action processing, reconciliation, and fund accounting.

The feedback from our colleagues in the Front Office has been great – errors are found and corrected much faster, data is delivered earlier in the morning, and Back Office and Front Office staff have moved closer to each other in terms of how they conduct their business. Operating in the same system, looking at the same screens, and viewing the same data, have definitely forged closer cross-departmental relationships and, hence, more efficiency.

What does it take from the organization to insource operations?

When you take your operations in-house, leaving behind the perceived comfort of just monitoring your outsourcing provider by strict SLAs and KPIs, you also assume full responsibility for the output. This means our staff have taken on new roles and new responsibilities. At NBIM, however, we feel, we have gone through this demanding transformation process quite smoothly.

Our employees were not only willing to take on new responsibilities; they actually embraced the change, including platform and responsibilities, with energy and commitment. Because we made the end-users part of the implementation project, they took ownership and became well positioned to gain the required knowledge. Furthermore, closely involving the business users throughout the project enabled us to work together with SimCorp to create a common understanding of NBIM business requirements and SimCorp Dimension design, and avoid heading in the wrong direction.

On the system support side, the system management team had to move from monitoring serviced solutions to being fully responsible for an in-house system. With the new platform, the activities associated with data loads and processing were taken in-house. This has brought us closer to our data, driving a much deeper understanding of how market data is produced and delivered, which has put us in a much better position to intervene and correct, if required.

The global perspective

By taking on the full responsibility of trade and data processing, we had to take over the support of our colleagues worldwide. We have strengthened our operational support in Singapore and New York with system and data management functions, as well as our capacity for transaction management and asset servicing. The positive effects of taking control of our own processes have been significant. We can now design our model to truly support a global operation. We are no longer reliant on end-of-day data from our service providers for trade processing and position keeping, and we can model our own processes to produce these data for the different time zones as and when we need them. The aim is to implement a true 24h model where data is readily processed and quality assured for our investment staff in all offices as they turn up for work in their local time zones.

The positive effects of taking control of our own processes have been significant. We can now design our model to truly support a global operation. We are no longer reliant on end-of-day data from our service providers for trade processing and position keeping… Age Bakker, Chief Operating Officer, and Kjell Johan Nordgard, Global Head of Systems and Data, Norges Bank Investment Management (NBIM)

Staying the course

Overall, the past six years of journey has been extensive and not without battle. Looking back, however, we definitely see that it was the right thing to do. We have achieved a lot, and we now have a platform that enables us to drive efficiency in our investment activities. A relatively small in-house organization is now supporting a global investment organization with strong demands for reliable and transparent data. In a few years, this organization has been transformed from the inside – with very little added headcount, but with great trust in our people and their professionalism and willingness to change.

We believe a key objective for an efficient organization must be always to strive towards a setup where resources are put to best possible use. This means that people should do what they do best, and then let machines do the rest. This delineation will continuously shift as technology and people evolve, but we think that our journey over the past few years has proven that investment management technology has reached a level, which enables this industry to automate and consolidate their processes to an extent that would have been difficult only a few years ago. We believe this trend will continue, and that the winners will be those who have positioned themselves well for the technological opportunities of tomorrow.

 

About the authors

Age Bakker was named Chief Operating Officer in October 2009. Bakker joined Norges Bank Investment Management earlier that year as Global Head of IT. He has previously held positions within teaching and the investment management industry. Age Bakker spent 14 years with Storebrand Kapitalforvaltning, most recently as Chief Operating Officer. Age Bakker has a master’s degree in economics from Vrije University in Amsterdam.

Kjell Johan Nordgard holds a master’s degree in electronics and computer science from the Norwegian University of Science and Technology and a bachelor’s degree in finance from Copenhagen Business School. He has more than 20 years of international experience with applied IT strategies in financial institutions, both as a technology supplier and a technology user. At NBIM, Kjell Nordgard is heading up a department with responsibility for NBIM’s portfolio of software systems and associated data and processes.

About NBIM

Norges Bank Investment Management (NBIM) is the asset management unit of the Norwegian central bank (Norges Bank). NBIM manages the Government Pension Fund Global, often referred to as the Norwegian oil fund, and some of Norges Bank's foreign exchange reserves. The overall mission is to safeguard and build financial wealth for future generations. NBIM’s investments are split between Equities, Fixed Income and Real Estate, spread across the globe. NBIM owns 1.3% of all listed companies globally. The funds value on 30 June 2016 was over 7 trillion Norwegian kroner, or approximately 852 billion USD. For more information, please visit www.nbim.no

[1] Gartner Symposium/ITxpo, Barclona, Spain, November 2015
[2] Gartner Group: New Industries 2030: Virtual Talent Industry (document 3063017)

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