Demand for real time analytics pushes investment managers towards consolidated platforms

According to the keynote speaker Daron Pearce, founder of consultancy Daron Pearce Associates and former CEO of Asset Servicing EMEA for BNY Mellon, a successful front office requires significant investments in technology, a strong organization, and a close partnership between the back, middle, and front office. 

“One key trend we have seen in the last few years is that investment managers are moving away from the complex best-of-breed model and towards consolidated systems that are offering an end-to-end proposition,” Pearce said during his keynote speech. 

A consolidated portfolio management system combines multiple functions into a single platform. By providing a comprehensive set of tools for portfolio construction, risk management and trading in one place, portfolio managers and traders have real-time data on their exposures across asset classes and investment strategies.

“This time, the move towards consolidated systems is based around the single dataset, and that is what’s different compared to previously, because then you don’t have that risk that a data field won’t migrate or deliver the same result from one application to another,” Pearce said, noting that data is at the heart of these propositions.

Innovation may be about alpha generation, operational excellence, or cost competitiveness – but what is new is that innovation is highlighted as the means to improve competitiveness.

Anders Kirkeby, Head of Open Innovation, SimCorp

Innovation takes center stage

In the 2023 Global InvestOps Report, 35% of 200 buy-side operation leaders cited front office innovation as a technology and operations initiative their firms planned to support their strategic priorities.   

Today, cloud enablement has become an important innovation in providing real-time analytics to portfolio managers, and there is a recognition across the investment management industry that Software as a Service (SaaS) delivers many value-added benefits over on-premise solutions.

The benefits tend to be empowering greater scalability, improved operational efficiency, and faster time-to-market. A clear testament to cloud adoption's mainstream status is that 91% of buy-side firms in the InvestOps report now use cloud-based software to support parts of their front office operations. 

Although innovation has always been seen as important, it has for the first time moved to the very top spot in the InvestOps survey on investment priorities, according to Anders Kirkeby, Head of Open Innovation at SimCorp.

"Innovation may be about alpha generation, operational excellence, or cost competitiveness – but what is new is that innovation is highlighted as the means to improve competitiveness,” Kirkeby said during his presentation. 

“In response to the need to adopt more available innovation, SimCorp set out to build an ecosystem of partnerships three years ago because we cannot build everything for every single firm out there. Together with our partners, we complete the picture and provide choice," Kirkeby said.

One of the newest ecosystem partners is multi-asset trade Execution Management System (EMS) FlexTrade Systems. This partnership addresses the increasing demand from trading teams for seamless integration and collaborative workflows between their Order Management System (OMS) and EMS solutions, optimizing trading activities and assisting in meeting best execution obligations.

Dynamic markets

Another recurring point from the briefing, which took place in London, was that the investment outlook looks uncertain and markets being more dynamic than ever.

The recent weeks of volatility driven by stress in the banking sector are only one of many testaments to this development, and the outlook is muddy, to say the least.

Broadly speaking, the investment management industry operated in a favorable environment for decades as falling yields boosted bond and equity returns significantly due to the discount rate effect.   

Between 1981 and 2020, the average excess return of the 10-year Treasury over cash was 3.3%, and an estimated 1.5% of this can be attributed to the windfall gains caused by yields falling from 12.4% to 0.9% during this period. 

For the S&P 500 index, the average return was 7.8% over cash. An estimated 2.7% of this (more than a third) can be attributed to the sample-specific windfall gains caused by the cyclically adjusted earnings yield (CAEY) falling from 10.3% to 2.9%, meaning that US stock index excess return would have been 5.1% in a more neutral sample period.

Even though interest rates have risen significantly in 2022 and 2023, the expected future return on 60/40 portfolios still looks lower than its historical average. This outlook, combined with geopolitics tensions at decade highs, results in an uncertain financial outlook, increasing demands for a well-functioning front office.

If you can be an early adopter, mobilize your resources, and think about how you engage in that end-to-end architecture, you can leapfrog your competitors and be a long-term winner.

Daron Pearce, Founder and CEO, Daron Pearce Associates

According to Pearce, tokenization is the future area for innovation affecting the front office space.

Tokenization is a capability that leverages blockchain technology to securitize assets. From a fund manager’s perspective, the key benefits include instant settlement and immutable transaction records. From the investor perspective, tokenization can increase access to private market funds. 

In 2022, the tokenization platform Token City surveyed fund managers across Europe and found that 73% of them believed private equity assets were most likely to be the first to see significant levels of tokenization, closely followed by hedge fund assets (65%).

“The new generation wants to be able to buy and sell assets automatically with no settlement risk and be able to view the real-time valuation of their assets. We need a complete rethink of that end-to-end investment lifecycle. It needs to be based on smart contracts - truly embracing tokenization - distributed ledger technologies, digital currencies, and digital identities,” he said.

During the panel discussion at “How to create a high-performing front office”, a panelist said that the main counterargument for distributed ledgers was trust. Although seamless settlement like using outlook to book a meeting sounds great, the question is who will the regulator chase when things go wrong, and who mediates potential disputes? 

The current regulation supports the existing model, and tokenized securities would fundamentally challenge the way that existing financial systems work. This means new international rules and regulation would be needed to enable this paradigm shift in the future.

Pearce concluded his keynote speech by saying that the winning investment businesses are those that think holistically about their marketplace, their client base, and embrace technology opportunities. 

“If you can be an early adopter, mobilize your resources, and think about how you engage in that end-to-end architecture, you can leapfrog your competitors and be a long-term winner,” Pearce said.