How to power up your investment decisions

Dean McIntyre is Director of Strategy GTM Asset Management for SimCorp. He has over 25 years of experience in the financial industry, both within investment management firms and on the vendor side. We asked him three questions about trends in the asset management industry and how to hone your investment identity to stand out from the competition in any market condition.

Q1: What are the main drivers for asset managers that are affecting the way the front office is operating?

I would break it down into three main drivers.

First off, the front office’s main focus has always been geared towards the search for alpha and in 2023 I can see this search continuing. So whether it's new types of investments like alternatives, or finding more data from existing datasets, the race is to get there before everyone else. Because by the time it is common knowledge, you need to have found the next new approach that will give you an edge. This is particularly the case in value players, also known as “active” managers, where the asset manager is actively trying to differentiate themselves by generating greater returns on investments as opposed to a volume player, which is more passive and focuses on broader volume.

The second driver is reducing operational cost and specifically the cost of managing and maintaining investment management technology. Are the tools they have on hand enabling best practice to achieve investment returns. Are they valuable for the front office? Are they effective? And how can the operating cost be reduced; the cost of data, the vendor solutions, the benchmark data as well as the different models of operating within the front office. This all adds up and there's more pressure especially with the reduction in fees to prove that the data that you're buying is valuable to the process and how that comes through. So operational costs in the front office is something that's pertinent.

And finally, there is a focus on human capital. Are we investing enough in the people? Are the people in the company able to fit with the new company's ethos? Going back to the age-old debate; do you want to manage bespoke processes and tools that require highly skilled and trained staff to maintain it or are you looking to reduce this liability by utilizing services. Subsequently reducing the cost of human capital for the supporting functions. This would see efficiencies in areas from compliance, order management to how the trade goes to market, empowering your investment decisions.

Cost of talent locations should also be front of mind. You have to ask yourself are you getting the correct balance of cost to value and that’s definitely something that's resonating in the front office.

Q2: How are some of the key players differentiating themselves from competition?

In a recent survey, 200 global buy-side leaders identified the need to increase competitiveness through tech innovation as their top strategic priority for 2023.

Speed is also important with a fast-moving market. We've seen war and politics all affecting investments, how do you react to that? Can you react quickly with the current system that you have in place? To stay ahead of the competition, you need to be able to launch products in a timely manner. For example, when we saw the change in oil prices after the war there was enormous pressure put onto all the other securities, were you able to react quickly to those changes?

Consider your current tech stack and how you are utilizing technology, not just to do the day-to-day tasks, but to learn about yourself from behavioral traits through to your operational processes. It is imperative to continuously review and reflect on how you could do better in the future. It is not only about the tech that helps you operate, but also on how it can provide insights on your operating model and identify ways to improve on it, enabling you to differentiate yourself from competitors.

There are new advances in tech such as AI and machine learning that can fast-track those insights, for example natural language processing. Such tech innovation aims to fundamentally change how institutional investors process unstructured data from their alternative investments. Do you currently have a clear view of all your investments, how they are made, how often, and how big you’ve gone? Maybe you’ve been holding on to your securities too long? How do you currently get to the bottom of this?

Machine learning can help you mine this information and is very powerful when you have a specific objective in mind.

Q3: What should you consider before embarking on a front office transformation?

One of the first things to consider before embarking on a front office transformation is looking at your company's strategy and what's the trajectory your company is taking. Companies typically go through phases of natural or inorganic growth. For an asset manager this can mean more complex assets, more volume, more clients and increased customer expectations. After growth comes a phase of stabilization where systems and processes can be beefed up to handle the new pressures. Are you confident your technology can scale to match your growth ambitions?

Secondly look at your company’s strategy on talent. Where do you want to have staff and where can you automate processes and maybe use services to support non-core areas. If you're starting a company from scratch, what would your ideal operating model look like?

Take for example a portfolio manager setting up a hedge fund, they did not wake up saying I need an operations’ function. They talk about the need to generate returns, and operations comes as a by-product of this. Do they really want to be doing the operations or not so much? What is the alternative?

This leads back to what your ideal operating model looks like and making sure it will stand the test of time. Start with these four building blocks to future-proof your operating model:

1. Holistic approach: aim for robust and scalable operations spanning the investment lifecycle with a full overview of risks
2. Focus on core business: making sure to reflect your investment identity, by having market data choices and a bespoke investment process
3. Leverage open IT architectures: choose open architectures that allow for easy plug and play integrations with any tech providers, data vendors, marketplaces, custodians and infrastructure providers
4. Recruitment and retaining top talent: cater to new and existing talent by investing in digitalization and automation for better end-user experience

To summarize, there are a lot of things to consider when embarking on a front office transformation however what is crucial is that you have a good understanding of your current operating model and where you want to get to. You can then create a timeline and start building towards it, balancing the value in the short term versus the long term.