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Integrated technology: Unlocking operational alpha

Although many firms may not realize the direct link between efficient operations and portfolio growth, the relationship and opportunity is clear.

An integrated platform based on a single source of truth, or an Investment Book of Record (IBOR), provides a timely, accurate and transparent view, into what the firm owns, what it is worth, and its exposure across the entire business. Thus, managers can gain much needed operational efficiency, make more informed business decisions and ultimately drive performance.

Data in Despair

By creating better control of enterprise data, investment managers can quickly and readily analyze that data, improve business performance, and gain competitive advantage. By investing in state-of-the-art technology, investment managers can achieve significant alpha by minimizing implementation shortfalls, arising from suboptimal investment operations.

We see a lot of technology today that is disparate and disjointed, with data needing to move from one platform to the next. In a recent survey from Adox research1, buy and sell side firms reported close to 40% of all core investment data in the front office, being spread across 10 or more databases. This paints a very complex and fragmented picture of investment technologies. But how do we know the data retains its quality as it moves through the investment lifecycle?

Whilst data lineage and audit trails go some way to minimize disruption, there are still many investment management firms, whose front-office personnel start their day by questioning, validating, reconciling and manipulating their position, cash and analytics data. They know the data in their front office tools is updated periodically, but also the very great possibility that the data may be stale, inaccurate or both.

TABB Group2 found in a survey not long ago, that more than half of senior front office personnel take at least an hour out of their day to unravel errors caused by ‘bad data’, which detracts from the time devoted to actual trading. Buy-side firms exist to preserve and grow their client’s capital, and to support their client’s investment objectives, not to integrate and reconcile disparate applications. Nor do they exist so that their highly talented investment professionals can waste their time questioning the timeliness, accuracy and quality of their data.

‘Best-of-Breed’ No Longer Best

Around a decade and a half ago, the industry moved forward with the idea of ‘best-of-breed’ solutions. This meant selecting the best systems by asset class and an investment accounting system to act as their shadow book of record. Or they would have a separate system to strike net asset values (NAVs) and bolt on several systems for risk, derivatives and performance. Today, the industry is firefighting its way through a data explosion, risk management and regulatory compliance. Whilst ‘best of breed’ is of course still functional, there are now solutions that allow you to manage the entire investment lifecycle across all asset classes and jurisdictions, by delivering superior capabilities through a fully integrated, modular architecture.

By adopting this integrated approach, you eliminate issues inherent in most legacy investment architectures, empower the asset manager with accurate data to generate alpha, and ultimately spend less time on manual procedures.

The implementation of this is not something that firms need to do in a ‘big bang’ approach. They can take regimented approaches to tackle the elements that are most important to the firm at the time, immediately minimizing cost and impact to the business. Then, over time, the rest of the investment life cycle can be addressed. This essentially means that you eliminate all the data movement and reconciliation issues that we see today in most legacy investment architectures, from the most painful downwards.

One System for the Entire Investment Lifecycle

We as an industry spurred the creation of Chinese walls between the front, middle and back office, and there are many different reasons why this segmentation was necessary, amongst them; regulatory requirements.  The Investment Management industry was forced to deal with the best available technology at the time, which created this unnatural separation from a process perspective. At the end of the day, the clients of investment management firms don’t care what the system architecture looks like. What they do care about, is adhering to their investment guidelines and generating the best possible performance. To show the best possible performance, firms need to minimize the manual processes and workarounds, often associated with operating numerous, loosely connected systems.

What is now clear, is that we should be thinking about technology solutions from an organizational-level perspective, to satisfy the requirements of the whole office and the entire investment lifecycle. It is high time we change the model to get away from the forced separation of these three groups.

Integrated solutions that embrace a full, front to back model across asset classes, will help endow the industry with the tools to reduce operational risk and compete successfully now, and in the future. In short, implementing a single source of data has significant benefits. Firms can gain the immediate advantages of low cost of ownership, real-time data, increased automation (STP) and improved data lineage. In the long term, there is a significant reduction in vendor risk and an increase in transparency across the investment process. In the end, an integrated strategy is a key fail-safe for growth.

New asset classes, instruments and endless possibilities

When you have an integrated platform that is covering the length and breadth of the investment lifecycle, introducing a new asset class or instrument, for example private debt, becomes a lot less complicated. If you look at a firm, which may have multiple disparate systems or service providers, they need agreement from all parties, if or when a new asset class can be supported. When you have an integrated platform, you limit the number of touch points, the complexity, and the time taken to add a new product type, by a great deal. For the asset manager, this could be the difference between staying ahead or lagging behind the curve.

The industry is now adopting a multi-asset class approach, where clients are not just coming to firms for an equity or fixed income mandate but more so, for alternative forms of alpha, be it real estate, private equity, infrastructure or commodities.

This is not a utopian view, it’s a reality. In a recent report commissioned by SimCorp with InvestOps this year, North American buy-side firms named multi-asset class strategies as one of the biggest strategic objectives for 20173. A finding that will resonate within the global asset management community. But the challenge for investment firms is when they get under the covers, figuring out what systems there are, and whether they can support these growing multi-asset class strategies.

At the end of the day, if they haven’t already, investment firms will soon be forced to address the technology discrepancy, critical levels of manual processing, and the necessary debugging of data, to truly achieve the growth that they seek.  Adopting a scalable and integrated solution that eliminates these concerns across the investment process, will in the long run ensure the agility required to grow in a continually challenging global economy.

This article originally appeared in Pensions & Investments


1. Adox Research, ‘follow the Money’ Survey, Front Office, 2017

2. TABB Group,” Breaking down buy-side barriers” and” The buy-side legacy IT hangover” 2016.

3. SimCorp & InvestOps, ‘Front to Back Office Optimization Report, 2017