Technology For The Portfolio Lifecycle

By Damian Bierman, Head of Asia-Pacific, Portfolio Management & Trading Solutions, FactSet

Buy-side technology continues to evolve, but solutions offering different pieces of the portfolio lifecycle form a patchwork landscape.

screen-shot-2018-10-01-at-3-35-25-pmThe integration of the portfolio lifecycle is fraught with complexity and challenges for all firms who navigate it. This has created an opportunity in the market for a new approach.

When we talk about the portfolio lifecycle, we mean, in the broadest terms, the process of executing an investment idea: Everything from researching the idea, generating an order, running it through compliance, trading, settling, and tracking performance attribution.

Most buy-side firms tend to fall into one of two categories when approaching a technology provider for the systems required for servicing their portfolio lifecycle. Either they’ve adopted (or evolved) a “best-of-breed” approach engaging multiple vendors, or they work with a single vendor who promises a complete “end-to-end” solution.

Best-of-breed or one-stop-shop

Firms that go best-of-breed have bought themselves a P+O+EMS (portfolio, order, execution management system) by engaging multiple vendors for the different pieces, and have most likely spent years integrating all of it, getting the different systems talking to each other. Then, once their solution is up and running for a while, what inevitably happens is that something changes which causes a disruption to that delicate balance – maybe the firm’s investment strategy evolves, or a particular set of regulations are introduced – and suddenly they have to deal with a multitude of vendors to make the necessary adjustments to get the new workflows to concord. It can quickly become a huge headache.

Firms that go the other route, to the “one-stop-shop”, live in a world where their vendor manages everything, but the trade-off is that they forfeit full autonomy. They can have control of the front-to-back operations, but only until they want to diverge from the prescribed solution. Even a slight amendment means surrendering some autonomy.

So, if you’re a small firm dealing primarily in a single asset class and you’re of a certain size with a relatively simple set of compliance rules, there are solutions on the market that will work well for you.

Until, of course, they don’t. Eventually, you’re going to want access to other asset classes, and as you grow your compliance rules are going to become more complicated. For instance, you may find that you need a different answer for transaction cost analysis to the one that’s being provided for you. In short: these products work well, until you outgrow them.

What ends up happening in the traditional one-stop-shop model is that, instead of the technology bending and moulding to fit the needs of the business, the business is forced to mould to meet the limitations of the technology. This limits the asset manager’s ability to implement an investment process that fits the requirements of their business, so they are forced to either to compromise on what they can actually do because of those technology limitations, or they are faced with numerous frustrating inefficiencies in the form of manual processes that lie outside of what their “all-in” system is capable. The result is incomplete information at different stages of the lifecycle, and information that’s not always there where and when it’s needed – most harmfully, at the point of decision. This approach leads to a “one-size-fits-none” type scenario, and it’s not a good spot to be in.

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A third way

But what if there was a better way? The ideal would be a complete solution with a degree of flexibility that allows a firm to have the best of both worlds. In effect, it would be a comprehensive system within an open platform. It is a compelling proposition for a number of reasons, not least of which is that a buy-side firm rarely if ever finds itself in a position to replace its entire technology stack at once. Clearly, there is demand for a higher standard, more flexible solution which provides a complete answer from end-to-end along the portfolio lifecycle. It should be inherently open and modular, built around a robust set of APIs that can be connected into whatever pieces of the portfolio lifecycle that a buy-side firm can’t, or isn’t yet ready, to replace.

In order for such an approach to be viable, the vendor offering it has to be fluent in several core competencies. First and foremost, it needs to have extraordinary system integration capabilities built into its DNA. It needs to know how to work with, manage, concord and align data from numerous, disparate sources. It also must be capable of managing complex workflows across multiple asset classes in a manner that’s robust and yet nimble enough to adapt to markets, strategies and regulations that change constantly. Moreover, it needs to be built for complexity, speed, and scale, and needs to have evolved capabilities for intelligently automating workflows to free up its human operators to add value in ways that machines alone cannot yet accomplish.

Real-time analytics

The common thread binding all those pieces together has to be a world-class analytical capability. This allows a portfolio manager to have real-time access to the trade executions happening on the dealing desk throughout the course of the day, as their investment ideas are turned into reality.

The very moment their investment ideas are transacted in the market, the portfolio manager is aware of what had been a trade simulation is now an active order that’s being filled; and as it fills, it immediately becomes part of the portfolio.

Having the ability to update all those analytics – contribution, attribution, performance, risk – in real-time is hugely valuable, but generally unavailable in the marketplace today. Yet, consider just how important it is when one misplaced tweet can send a company’s stock price into a free-fall. If you are portfolio manager holding that stock, surely you cannot afford to wait 24 hours to assess the extent of the damage to your portfolio. Instead, you would want to act immediately to restrict losses. A comprehensive solution that facilitates that timely response is a true game-changer.

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