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Further digitization on the horizon for investing

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Institutional money management’s use of technology is expected to burgeon in the next two years, with that growth driven by a better understanding of what to do with it, sources said.

“The difference between people’s experience with how they interface with technology in their personal lives and their consumer lives, and the gap between how they deal with that technology in their investing lives, are quickly closing,” said Sudhir Nair, managing director, global head of Aladdin business in BlackRock Inc.’s solutions unit, New York. “That is creating incredible change.”

Added Thomas Kim, CEO of fintech software provider Enfusion Ltd. LLC, New York, “Today, everything is centered around data — accessing it, using it, extracting insights from it — and in the next two years, there will be much more advancements in how … to utilize intelligence in extracting those insights in a much faster and more meaningful way. It’s not that it hasn’t started already, but it’s such in a nascent state today that business intelligence using artificial intelligence will become much more common practice.”

Continued developments and improvements in investment management technology over the next couple of years will revolve around:

  • Efficient data analysis.
  • Customized investment strategies.
  • Digitization of investment processes.
  • Cybersecurity.

Much of the promise of technology has centered around data, said Eric Bernstein, president of asset management solutions at Broadridge Financial Solutions Inc., New York, but data’s use has not matched its potential because the industry still generally employs traditional low-tech methods across their operational infrastructure.

“Start with the allocators,” Mr. Bernstein said. “If you think about what asset owners get from every manager, they’re getting everything from a PDF report or an Excel spreadsheet to access to an investor portal. The struggle they’re facing is in normalizing and homogenizing that information.”

Technologies like artificial intelligence have been touted for years as ways to help the industry consume data better, but adoption in the industry has been low, Mr. Kim said.

“I don’t think the technology — and the money manager, quite frankly — has matured to the point where you can say they’re going to use it for X, Y and Z,” Mr. Kim said. “Pension funds aren’t going to adopt new ways of doing things without those new ways having gone through the rigor and time to see if they’re reliable.”

Among money managers specifically, many firms don’t have the scale to handle data management internally, said Richard Taggart, executive vice president, alpha services at State Street Alpha, Boston, an operational services provider that includes front-, middle- and back-office services and automated services from Charles River, which State Street Corp. acquired in 2018.

“If you look at all the big asset managers, only about 30% have outsourced things like data management and middle office and technology,” Mr. Taggart said. “You’re going to see more money managers outsourcing that critical infrastructure so that they can focus on what differentiates them — their ability to generate alpha, their ability to understand a client’s requirements. All the core stuff they need to keep the lights on, they’re not going to do that anymore.”

The transition from low-technology to advanced tech in the investment process has been easier in asset classes like equities than in fixed income, said Sandy Rattray, chief investment officer of Man Group PLC, London. Fixed income is “20-30 years behind equities from the perspective of technology driving the marketplace,” but the industry is starting to change, Mr. Rattray said. Man Group manages $120 billion in assets.

Mr. Rattray said it’s now possible to get streaming fixed-income prices, quickly buy and sell fixed-income securities and provide as well as demand liquidity. In the past, he said, “all we could do was telephone banks and ask them for quotes and they would send us them in a very manual process,” but the changes “have been a function of exchange-like technologies that were initiated in equities and futures now coming to bear in corporate bonds. So that means you now have something much closer to continuous prices in corporate bonds, and you have prices for a very wide range of bonds.”

Gary Collier, chief technology officer, Man Alpha Technology, Man Group’s front-office services unit, said credit as an asset class “is a number of years behind equities in terms of electronification of markets, and therefore it is an area where we’re looking to take advantage of inefficiencies and focus on the data side and on the execution side.”

Bringing technology more to bear on investment management will impact the strategies used by institutions, particularly with targeted allocations to meet specific needs, said Dan Houlihan, executive vice president, head of asset servicing-Americas at Northern Trust Corp., Chicago.

“Digitization of the investment process is happening now, and I believe will continue to accelerate in its acceptance,” Mr. Houlihan said. “Right now, at most firms with fundamental active management, the process is in the heads of the portfolio managers. Through computing power, you can customize it so it’s actually codified in the system, which gives you a 24/7 digital investment committee, essentially, but also allows you to run pro forma portfolio measurement that actually measures the efficacy of the process, not the underlying investment decisions.”

Ashby Monk, executive and research director of the Global Projects Center at Stanford University, Palo Alto, Calif., said mass customization of individual institutions’ portfolios “could be real in the era of technology, where managers could get access to your portfolio and deliver real products and services that could fit your needs … The more you can solve people’s problems, the more you can make money.”

Such customization can be expanded through technology into a “whole portfolio concept,” which Mr. Nair of BlackRock said will become more popular in the next two years.

“The fundamental way portfolios are being built is changing,” Mr. Nair said. “It goes back to outcome orientation — the need to blend asset classes across equities, fixed income, truly multiasset, but beyond just asset classes, public and private, is critically important. We’ve seen this trend of increased allocations to private markets and our view is that’s only going to continue.”

That trend to more private market investments could be made easier by technology, Mr. Monk said. “By moving data efficiently and quickly, it’ll be a quick way to level the playing field. There’s economic value for a lot of people to level the playing field, especially in private markets,” Mr. Monk said. “Managers have been getting away with charging ridiculous fees for investing in companies we’ve all heard of, and if technology can give us access to that, why would we pay two and 20 (fee arrangement)? There are a bunch of tech platforms helping to facilitate that (direct) access.”

Along with a broad application to investment infrastructure, technology will have an effect in how investments are actively and passively managed.

Mr. Nair said BlackRock is “seeing a resurgence in active investing in terms of ways different managers are using technology and data to change their investment process to find new and different sources of alpha. That is still critically required and paramount to the industry.”

Ian Peckett, global head of buy-side product at Bloomberg LP, New York, said passive money managers all tout efficiency in their investment strategies through mimicking and reflecting the market. “Operational efficiency and operational excellence … has come out of the passive (investing) world, where it’s less about delivering alpha and more about delivering beta with the lowest level of cost,” Mr. Peckett said. “Both of those dimensions lead to people taking a more systematic, more algorithmic and more data-driven approach. It’s a less subjective and less intuitive way of investing.”

Technologies that have been used in passive investing “start to gain credibility and find application in the active space,” Mr. Peckett said. “Look at robotic process automation; that’s really the next evolution of outsourcing. These practices tend to be emerging, developing, establishing a level of credibility in their own space and then expanding into other domains. I think you’re going to see that” in the future in money management.

Also expected to benefit in the next two years through better data technology is sustainable investing, Mr. Monk said. “When you hear people say, ‘We’re spending a lot of time on sustainability and ESG,’ what you should hear is data management, that ‘we need to figure out how to use ESG data in our decision-making.'”

Mr. Taggart of State Street concurred. “There are dozens and dozens of signals from different providers about (ESG) factors and institutional asset managers are now being mandated in many cases or compelled to introduce those factors into their investment-decision processes,” he said. “The explosion of data you can use beyond the traditional value, growth, yield kinds of things, the ability of data to be used in things like ESG is multiplying. The data helps with monitoring both ESG as an alpha driver and a compliance driver.”

On the operational side, a prime concern in the industry — cybersecurity — will be outsourced by institutional investors over the next few years to asset servicing providers well-versed in cyberprotection and the ability to offer a whole-office approach with a higher standard, Mr. Taggart said.

“If you’re providing the whole supply chain yourself, then all those parts of the chain have exposed weaknesses,” Mr. Taggart said. By outsourcing cybersecurity responsibility to a financial services provider, he said, those firms like State Street must adhere to stringent global cybersecurity standards that designate banks and financial services firms as systematically important with stronger requirements for cybersecurity than typical best business practices. “That allows you to check the box on much of those cybersecurity requirements,” Mr. Taggart said.