Read this article and learn about:
- How you quantify your IMS system’s impact on performance
- The importance of reliable technology
- The challenge of structuring the vast amounts of data
- How to successfully execute a quantitative investing strategy
About the author:
Helmut Paulus, CEO and CIO, Quoniam Asset Management
Prior to co-founding Quoniam, whose majority shareholder is Union Investment Group, he worked at DG Bank and the former Dresdner Bank Investment Group in the area of quantitative investing. Helmut Paulus is an acknowledged expert in this field since graduating in industrial engineering.
Journal: Thank you for taking over the CXO relay from Martin Oxelius, Chief Operating Officer, Swedbank Robur. To begin, would you please briefly introduce your firm and the technology-enabled innovation it applies as a leading quantitative asset manager in this specialized market niche where technology is hardly out-of-the-box?
Helmut Paulus: As an independently operating investment boutique, we focus on quantitative asset management solutions for institutional clients only. What we understand by quantitative asset management is analyzing the incessantly increasing amount of data available nowadays, in a highly automated environment and in terms of how it makes sense and why it is relevant. We have a huge database processing a vast amount of data every day in order to derive and deliver superior investment decisions. That is our objective.
Journal: With the current focus on how firms can get the most out of their operating platform, how do you think IT can be most efficiently applied to investment management generally and in what ways can it most successfully support and enable quantitative asset management specifically?
Helmut Paulus: For us, quantitative asset management is all about collecting a vast amount of economically plausible and statistically relevant data. Economically plausible means that we are processing exactly the same figures, exactly the same relationships as fundamental asset managers would look at. Our work is no different than other investment managers. The only difference is that our special requirements as a quantitative investor dictate that we have the technology to analyze hundreds or even thousands of balance sheets more or less simultaneously within a specific timeslot.
Journal: Exploring this theme a little more, what do you see as the steps a firm like yours should take to ensure its technology meets the challenge of improving portfolio performance and hence business success? In this context, is technology-enabled innovation a competitive differentiator?
Helmut Paulus: The challenge nowadays is not to get the information you need to improve performance because there are multiple sources that are willing to sell you any kind of data, in real time, daily, monthly, quarterly, and annually. The challenge is to structure the data in an appropriate way and to process it in such a manner that it is correct, reliable, and forms the basis for informed investment decisions. Here a competitive differentiator is to define a reliable system or platform that is able to continuously analyze any kind of incoming data in terms of its impact on our investment decisions.
Journal: We have seen that technology can also have disabling features. One is the risk that the technology becomes outdated and impedes business development and expansion into other asset classes. What other risk factors do you regard as crucial to take into account in quantitative asset management, i.e. is there disruption in your market segment that demands innovation to stay competitive?
Helmut Paulus: It’s clear that data volumes are increasing exponentially – as are the asset classes we have to cover. Even the most conservative investor today is requesting investment solutions with a global perspective. Here technology serves as two sides of the same coin. On the one side, you must have reliable technology that is capable of dealing with this constantly increasing amount of data, to process it, and to absorb it. On the other side, the technology itself in terms of hardware is not the solution that guarantees you will perform better than your competitors. The technology you really need means programming your systems correctly, developing a unique data warehouse where system architecture experts structure this vast amount of data appropriately. Getting the data structured right is one of the factors that make you competitive.
Journal: How important for you as a leading quantitative asset manager is having a technology solution that is constantly updated?
Helmut Paulus: Having a constantly updated technology solution is crucial. But human insight is also a very relevant factor in order to identify the hardware, as well as the unique proprietary software that throws light on the way your data hangs together. It’s no good just going out into the market and buying any kind of financial software off the shelf and plugging it in, so to speak. It’s something you need to carefully select, customize, and map with your business requirements – with continuous system amendments over time as these needs and the market change. Preferably, this should be architected in close collaboration with unique in-house expertise on your specific business processes.
Journal: In addressing the need for applying a workable technology solution to everyday business requirements, what other factors or criteria do you think investment managers like you need to consider?
Helmut Paulus: You need a system that scales very easily and which can be enhanced as new requirements arise. In our fast-moving and competitive environment, and in view of our very special needs as a quantitative asset manager, we need to have a developing platform, as well as test and production environment at hand. In order to be constantly ahead of the curve, you must establish a set-up where the intelligence of the investment professionals is constantly relayed to the investment technology people who are capable of coding and turning their thoughts into action. This means that if you do not have the skills in-house like we do, you need to have a very close working relationship with your technology provider. In our competitive space, it is becoming increasingly important to have the flexibility to move into emerging markets, to move into different spots of the global capital market. To compete and stay ahead, you need to exercise great flexibility in modeling the returns and risks of these kinds of assets appropriately – you need more globally diversified skills.
Journal: With the current low-interest rate environment likely to persist, what in the longer term do you view as the main growth opportunities and IT challenges facing the asset management industry generally? Are structured products one of the answers and are there IT-related issues in managing these assets?
Helmut Paulus: it’s quite obvious that in the current environment investors are seeking out higher yielding assets. These kinds of assets are typically riskier, comprising corporate bonds, for example. But investors cannot afford to ignore fixed income because, owing to limited risk budgets, they cannot shift 100% of their assets into equity. So fixed income will still play a vital role in terms of future asset allocation. However, the more you invest in the higher yielding universe, the greater the importance of diversification becomes. For that reason you need to have the capabilities to analyze larger universes; not only must you forecast asset returns correctly, but also ensure that you have the capability to estimate the risk – this is key.
Journal: Looking back on your past years of professional asset management experience, how do you keep up with trends and developments impacting the industry?
Helmut Paulus: I think you have to observe every trend in the industry very carefully because our clients and their needs define the trend. For me, it has always been extremely valuable to observe the trends and products in the US and UK markets. For decades, these markets have been drivers of trends and innovation in the asset management industry. London has the attention of global markets and provides us with the ultimate vantage point to analyze global markets and trends. Last, but not least, it is important to observe and discuss new trends regularly at different academic conferences and within international industry-specific organizations or institutes.
Journal: Thank you for your penetrating observations. With a view to continuing the dialogue, whom would you like to hand over the relay to in the next issue of CXO Corner?
Helmut Paulus: I would like to hand over the word to George Batejan, Executive Vice President, Global Head of Technology and Operations, Janus Capital Group, whom I’m sure with his considerable professional experience will have some insightful things to say about the challenges facing the investment management industry.