The investment data and transparency demands of some institutional investors, and their drive to reduce asset management costs, have had a “transformative” effect on technology development in the investment industry, since the financial crisis, according to investment consultants and tech-sector specialists. They caution, however, that to optimize how they adopt or use these new tools, institutions need to be clear and realistic in their own minds—and with their asset managers—on what applications and amount of data is appropriate for them. One pitfall, some specialists say, is that in their zeal to maximize transparency in their service provision, institutions may waste scarce resources trying to manage data they have neither the time nor the ken to exploit.
Technology solutions available to asset owners today are far superior to a generation ago. Sophisticated institutions now demand risk-based portfolio attribution and the unbundling of manager-fee arrangements, among other things, to meet changing regulatory requirements.
Though Russell Kamp, managing partner at investment consultancy, Kamp Consulting Solutions, finds the subject of data delivery to investors interesting, he is skeptical about the amount of information pension plans can effectively utilize. “Here’s my skepticism: too much information can sometimes overwhelm one’s ability to focus on the salient points,” he said. “There are obviously sophisticated pension plans in the corporate and public sectors, but I don’t think the average plan sponsor will not be able to react to all that information in a way that will be beneficial.
Most plan sponsors meet once on a quarterly basis, they receive actuarial data once every six months—generally, I don’t know that if they have real-time data they have the ability to react to it.”
“We have been increasing our requests for transparency around the details of fees and expenses, especially from our managers of private assets—PE, infrastructure, etcetera—or managers of hedge-fund-type structures that include miscellaneous fees and expenses,” Bob Jacksha, Chief Investment Officer of the $13 billion New Mexico Educational Retirement Board (NMERB), confirmed. “We are looking closely at systems that might help us aggregate incoming reports and data. Acquiring these systems would allow us to standardize the handling of data and reporting,” he said. Nevertheless, he added, “I would agree with the question around too much information, especially with portfolios that have substantial and diverse allocations to alternative investments, as ours does. Thus, in our looking at systems to help manage the data, it is important to focus on the relevant data and [not] just become a data collector.”
“Obtaining more data can be more of an issue than a solution,” the chief investment officer of a large Mountain State’s public retirement fund concurred. Because resources (staff, time and money) are scarce, “the focus needs to be on quality and integration of data into analysis. Less time gathering data, more time making judgments based on data, both quantitative and qualitative. Too much time now is spent gathering, moving and correcting data quality issues. All of this data integration takes resources, which can make it difficult for small organizations to manage without significantly leveraging external advisors,” he said.
Drowning in Data?
According to a report titled Optimizing Data in a Transparent World, published in May by Northern Trust in conjunction with the Economist Intelligence Unit, a growing wave of data transmission, aggregation and analysis tools can help asset owners find a balance and make transparency less of an operational burden and more of an opportunity to achieve goals.
“Asset owners, in particular, need to manage a proliferation of data. We believe the same technology that produces those reams of data can be deployed to make the best use of it,” said Penelope Biggs, chief strategy officer for corporate and institutional services at Northern Trust. “In our view, there is a convergence in the expectations of asset owners and investment managers around the need for real-time, flexible and portable data and intuitive analytics.
She explained that asset management firms are using artificial intelligence (AI) to analyze structured data, (e.g., asset flows and performance) and to extract information from unstructured/alternative data (e.g., images, documents, social media posts) through image recognition and natural language understanding capabilities. Asset managers are also using machine learning (ML) models to predict price movements in securities, and their roboadvisor platforms use AI to help investors decide on their asset allocation, she said. “Emerging technologies, such as ML, enable Northern Trust to mine, interpret and deliver increasingly insightful information to our clients, including investment teams in the front office of large asset owners, while AI can be applied to drive operational productivity, enhance cybersecurity and manage risk,” she claimed.
I’ve worked in the industry for almost 30 years and never before have the managers tried to figure out how to invest significant amounts of money in transformational technology programs like now
The AM’s Perspective
Asset managers are thinking about technology as an enabler, according to Lesley Keefe, executive director and Americas asset management advisory leader at consulting firm EY. Technology is a big category, she said, and the question for asset managers is how do they evolve from where they are now technology-application wise to dealing with legacy infrastructure and employing shorter-term tactical technologies, such as robotic or AI, to drive quality and scalability.
Keefe’s practice involves consulting with asset managers that are seeking solutions to challenges presented to them by their institutional clients and business prospects. “I’ve worked in the industry for almost 30 years and never before have the managers tried to figure out how to invest significant amounts of money in transformational technology programs like now,” she said. “We have an eye on what the asset manager of the future will look like, and by extension what does that mean for the asset owner—and what’s the dynamic between the two?” Keefe said.
“But what does digital really mean in asset management and what does the institutional client experience?” Keefe asked, rhetorically. She said that in the institutional market, technology adoption is evolving and is still to be defined regarding what are benchmarks for institutional asset managers.
What first comes to the mind of Alan Kosan, head of alpha research at institutional investment consultancy Segal Marco Advisors, regarding the world of tech applications, is AI and machine-learning, specifically how they are being utilized by managers to advance data-driven decisions, trend or pattern recognition, and trade execution. “AI is the principal tech theme we have asked the analysts to start inquiring about in due diligence of the Process principle,” he said. The firm analyzes asset managers based upon seven distinct topics, which it dubs pinciples. Process is one of these principles.
Early observations are uneven among the managers and asset classes and still in the development stage, he said. “Earliest penetration and traction is in quant-based and model-driven strategies, but the field is gathering steam and expanding to target discretionary investment decision-making and back-office applications. Clearly, the use of advanced technology to make back-office and administrative functions more efficient will confer a profit advantage to those firms.”
He said asset managers in the more traditional asset classes and hedge funds have expressed interest, with private market managers more interested in investing in the space than employing in their practice.
“The key to assessing this tech-based trend will be to discern whether and how it adds value to the decision-making process, which results in better investment selection and performance results. Those firms utilizing advanced tech successfully in these areas will certainly have established a competitive advantage,” he said.
New technology can help drive transparency, but communication between asset owners and asset managers is crucial to helping owners drill down into the most important data that will allow both sides to meet their goals.
Growing AM Tech Spending
Spending on technology in all segments of the financial services industry globally approximates $100 million year to date, versus less than half that amount a decade ago, according to Danielle Tierney, a senior analyst at New York-based Aite Group, an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry. She said that approximately 10% of that spending represents “straight tech spending” (meaning expensed spending, not capex) in the institutional asset management sector. She explained that the biggest share of this spending is for regulatory compliance technology and order and portfolio management, at approximately 20%, adding that 60% of that spending is with external vendors to financial services firms and 40% is on internal spending at those firms.
“There’s definitely been an increase in asset management compliance spending—that’s been a big area in recent years with a higher rate of expenditure. Unbundling [providing transparency on how asset management fees are composed], that’s a conversation in European markets and in the U.S. too,” she said. “The biggest chunk of spending has been on portfolio management systems,” she said, noting that a rough approximation is 40% of spending has been in the U.S., 30% in Europe and the balance in Asia and the rest of the world.
Northern Trust’s paper notes that some measure of the drive for greater transparency by investors has been fueled by a new wave of disclosure rules that bring previously hidden or unknown costs and conflicts to light. With transparency in mind, many asset managers go beyond mandated disclosures, taking advantage of new technologies, such as chatbots, to answer clients’ questions, automated tools and AI-enabled data analysis platforms to provide more data and analytics to clients and prospects. Both sides need to be aware that doing so sometimes leads to overwhelming amounts of data for asset owners to manage, according to the report.
“Transparency requires context and insight, not just more data for asset owners,” according to Northern Trust’s Biggs. “New technology can help drive transparency, but communication between asset owners and asset managers is crucial to helping owners drill down into the most important data that will allow both sides to meet their goals.”
To avoid data overload, asset owners need to consider the purpose of the data they request and how that information would help them achieve their intended outcomes. For instance, large asset owners may want to know more about the market impact of their trade orders so that they can mitigate how their transactions affect stock prices. But for small investors with no market impact, such information may only complicate analysis, according to the paper.
Asset owners are starting to look like asset managers and think like asset managers, even if they are purely asset allocators, Keefe observed. “So, things like an IBOR [investment book of records] and looking and seeing positions in near real time—I want to see all my positions, I don’t want latency of more than a day or two. I don’t want to wait to the end of the month to get my statement. So, they are all looking at how to be more sophisticated in terms of how they oversee and govern their investments,” she said.
“The way they are starting to think about this is the concept of IBORs. A way to intermediate and aggregate but also provide analytics and look-through (what people think of as a middle office view) is to use a third-party administrator or tech platform, which aggregates data for providers and gives the investor an integrated view,” Keefe explained. The challenge currently is that it is hard to get a consolidated view of both public and private assets. “I can see my Treasury bonds over here and I can see my private holdings over there, but how do I get my IBOR to give me both in an integrated view?” Keefe said.
“There are dozens of service providers and software providers that are trying to solve that problem, but that’s how asset owners are thinking about it as a solution. It’s not easy to find a solution, but it’s technology that solves that problem for you.” She concluded.