Data management and the search for alpha in a shrinking market

Read the interview and learn about:

• Why M&A alone does not translate into alpha
• Why M&A increases existing data management challenges
• Taking a strategic approach to data management
• Reaping the benefits of system consolidation

By Duncan Cooper, Product Manager, Data Management & Connectivity, SimCorp

A flurry of M&A activity has swept across the global asset management landscape, shrinking the institutional investment market. Several asset managers have already taken the leap, with the aim of stemming outflows and heavy-discounting, in the face of cheaper passive investment vehicles. But while M&A may be a way to protect profitability, it often increases the burden of existing data management challenges. This article explores the practice of M&A and the strategic importance of data management.

The past 18 months have seen the merger of giants, Janus and Henderson, and Standard life and Aberdeen Asset Management. In continental Europe, Amundi, a conglomerate of France’s Crédit Agricole and Société Générale, bought Pioneer Investments, while in Asia Pacific, Japan’s Softbank acquired US alternative asset manager, Fortress Investment Group, for $3.3 billion.

M&A and the data management challenge

According to Casey Quirk, a practice of Deloitte Consulting LLP, asset management firms will soon experience the “largest competitive realignment in the industry’s history.” But while M&A may hold the key to clawing back the cost efficiencies which asset managers desperately seek in the immediate term, it also creates additional challenges: how to integrate two disparate organizations into one efficient and effective entity? The most significant is the challenge of data management, which is facing all asset managers but is exacerbated by M&A.

In the last decade, the rapid proliferation of data has evolved the way asset managers consume market, reference, and transactional data. Firms must source, process, store, and publish more data, more frequently, and with greater accuracy than ever before. This has significantly transformed the core requirements around how investment data is managed. With increasing volume and complexity, plus the increasing direct regulatory focus on data itself, neglecting data management is increasingly becoming a risk that no investment management firm can afford to ignore.

Taking data management to the core of the firm

With all of these challenges, data management should be core to any asset management firm. The more efficient a firm’s data management is, the more cost effective that firm will be in the longer term. In M&A, the merging firms do not only face this challenge twice, they also face the daunting task of merging two disparate organizations into one. Only by rigorous data management can they hope to rationalize disparate data sources, systems, datasets, and procedures into a single rational whole, to realize the hoped-for efficiencies.

But data management is not just about operational efficiency and cost reduction. In a shrinking market, where competition is rife, and the search for alpha heightens, data that is managed effectively can help a firm better understand and retain its clients, identify cross-selling opportunities, create new lines of business, and ultimately optimize investment decisions. This is an invaluable tool that firms can’t afford to overlook, especially in today’s low margin world.

Tackling data management and integration strategically

So, when entering the M&A process, one of the key strategies firms must devise very early on is how to efficiently consolidate the voluminous, dissimilar, and even conflicting data sets that live in the disparate systems of both entities, to deliver this long-term value. This requires a transition from simplistic thinking in terms of systems and integration, to rigorous management of key data resources, as well as elimination of duplication, inefficiencies, and risk, to identify and release the alpha-potential of the data that lies at the heart of those systems.

In the past, reviewing systems and data infrastructure has tended to end at the bottom of list. For some it’s been an open and shut case of one set of systems over the other, providing the merged entity with the cheapest total cost of ownership. Others have simply continued with multiple systems from both entities, because the task of consolidating systems seemed too daunting or impossible even, while others had never investigated or considered it necessary at the time. As a result, there are plenty of examples of financial institutions formed from historical M&A, still running in a spaghetti environment of legacy or ‘best-of-breed’ systems, which no longer serve their purpose.

System consolidation is key

Today, there is more knowledge and evidence about the benefits of consolidating systems and data infrastructure, both for individual asset managers and clearly for merging firms. Furthermore, there is more knowledge about and availability of integrated solutions that can enable consolidation – and make it a much less frightening process than it was previously considered. As Pentagon Consulting’s Clare Vincent-Silk surmises, there are now more integrated systems available to firms than ever before, ‘enabling them to bridge any gaps in functionality’.

Merging or acquiring firms still reluctant to take the consolidation approach need to ask themselves, whether the patchwork of disparate systems returns enough value in terms of supporting the business’ strategy, to justify the costs? When making a business case, the majority of firms will see that the bulk of investment processes can be standardized and automated, with fragmented and duplicating systems consolidated, and a new rigorous management framework put in place.

Tackling data management up front will help realize the alpha sought for

Addressing data management from the very beginning will have significant beneficial consequences for a merging firm’s future. For one, reducing the number of systems and interfaces minimizes cost of latency, cost associated with upgrades and maintenance, removes manual processes, and equally important, eliminates the operational and vendor risk associated with so many moving parts.

Beyond cost and risk reduction, consolidated data management delivers timely and reliable data in the front office, critical to informing investment decisions. In a recent WBR InvestOps survey conducted with 100 buy-side firms in North America, as many as 89% of Heads of Ops stated provision of timely and accurate start of day positions and cash, as a top challenge.¹ This has a major impact on the firm’s ability to compete. Research from industry consultancy, Forward Look, Inc. suggests that improved timeliness and quality of key data sets such as cash management can translate to anywhere between 51-242 basis points (bps) of inherent alpha.

In addition to the automation that comes with data consolidation, or in the case of certain datasets such as the data from data vendors, outsourcing data management altogether, can also free up a firm’s finite manpower from manual or generic tasks, to allow them to focus on high value tasks, such as exploring new business opportunities. That should be an objective at the forefront of any merging firm’s strategic vision.

Consolidated data management also plays into other strategic alpha-generating synergies that are sought from M&A, such as access to new asset classes. Investors are increasingly pouring into alternatives such as private debt, in a bid to further diversify their portfolios. However, according to a recent Celent report, James Wolstenholme argues that “Underneath the covers, legacy operations can’t efficiently and safely handle the stretch of these new multi-asset investments right from portfolio construction, through trading to portfolio management”.

The current difficulty asset managers are having in serving their clients’ strategies is further indicated in the WBR InvestOps survey, which found 62% of buy-side firms citing alternatives and private debt as the most challenging and costly asset classes to support. To date, firms have spent significant money on niche or unicorn systems supported by manual workarounds and reconciliation. Data management can mitigate and control the risks and costs of such fragmentation.

Make data support your business strategy

The expected raft of M&A deals throughout the coming years, will likely change the shape and size of the industry, intensifying the spotlight on cost of operations, but also the ability to generate returns. A tipping point will be reached, where firms will be forced to re-think the way they approach data management. To make M&A a long-term success, firms must look beyond the immediate gains of cost cutting and culling and investigate the true potential of effective data management. Ultimately the question these firms should be asking is this: What use is the data we hold within our firm, if we can’t access it and generate value from it to support our business strategy?

About the author

Duncan Cooper is Product Manager for Data Management & Connectivity at SimCorp. Duncan has worked within financial services for over 23 years and has specialized in investment and wealth management for the past 18 years. He is a subject matter expert covering all aspects of the investment management lifecycle with a deep knowledge of operating models, data and technology architectures. Duncan has worked with enterprise data management for four years, delivering strategic product design, sales and consulting capabilities for a variety of companies. Before joining SimCorp, Duncan held leadership positions in consulting, data vendor, and financial software companies.

1 ’Operations as a Competitive Advantage for the Buy Side’, WBR, 2017.