Megatrends: Investors set for a technology arms race
Technology has become central not only to what institutions invest in, but how they invest – the tools they use to allocate capital.
Back in 2000 spreadsheets formed the basis of how many asset owners – and indeed asset managers – ran investment portfolios in Asia and elsewhere. Their tech demands have evolved dramatically since then, as investment portfolios have become more diverse and complex.
“The holy grail for asset owners now is being able to access valuations at any one time across the entire portfolio, across public and private markets, in the investment book of record [Ibor],” a tech specialist at a Southeast Asian sovereign wealth fund (SWF) said.
Speeds of access to Ibors – centralised databases of ‘cleansed’ information in a standardised format – are accelerating, he told AsianInvestor on condition of anonymity. Some give an end-of-day snapshot, others can do so hour by hour.
“The utopia is to get it in real time, but that’s a lot more expensive to pull off, because there’s so much data being crunched for positions happening on the fly,” said the tech specialist. “For us, it’s close to real time; there’s a half-hour time lag.”
Some asset owners have found that recent coronavirus-fuelled market volatility has vindicated their decision to implement a so-called ‘total portfolio approach’ (TPA) in recent years. This relies on sharing real-time entire-portfolio data across an institution and strong collaboration between investment teams.
“We have real-time dashboards that can … give you any slice and dice of the portfolio you want to see,” said Sue Brake, acting chief investment officer at Australia’s A$162 billion ($112 billion) Future Fund, during a webinar hosted by AsianInvestor and software provider SimCorp in June.
Similarly, Norway’s $1 trillion sovereign wealth fund has ramped up its use of tech for monitoring external managers and built tools in-house that extract data from its internal database. “All of our external managers run segregated accounts for us, so we have a daily overview of what they are trading,” Erik Hilde, the fund’s head of external strategies, told AsianInvestor.
RISING TECH SPEND
Indeed, investors’ increasing use of tech and data has reflected the evolution of portfolios and asset manager-client relationships, which have grown broader and deeper. Fund managers are recognising this.
“Technology is the number one area for continued investment over the next five to 10 years,” remarked Sheila Patel, chairman of Goldman Sachs Asset Management. “It is critical to everything we do and is the arms race in the asset management world, so to speak.”
And the coming decade will see asset owners’ technology requirements become even more advanced – and expensive.
“Within the next five years it will be the norm ... to have real-time access to, and discussions on, portfolios due to technology, rather than just receiving a monthly report on the portfolio,” Mark Browning, head of Asia at US asset manager Franklin Templeton, told AsianInvestor.
Of course, that sort of capability will not come cheap. “The bigger asset managers are basically tech companies now,” said the Hong Kong-based chief investment officer at an insurance firm. “They constantly need to be investing millions of dollars [on tech] just to stay still, let alone grow.”
Accordingly, mainstream software providers – such as BlackRock (with its Aladdin platform), Charles River Development and SimCorp – charge annual licence fees in the millions of dollars. The unnamed SWF tech specialist said he has seen a quote for a yearly fee topping $5 million for an end-to-end system.
Some investors, meanwhile, look to source modules from different providers. Index and analytics firm MSCI, which does not offer an end-to-end platform, sometimes works on specific parts of an asset owner’s system and other times works with providers to provide an integrated solution., said Jack Lin, MSCI’s head of Asia Pacific.
“Sometimes the asset owner wants to manage the process itself and hold a tender for each individual part of the system,” he told AsianInvestor. “This is happening more these days.”
CULTURE SHIFTS
But the ideal for tech vendors is to tie asset owners and large fund houses into a core front-to-back-office portfolio management system
Once an asset owner has gone through the selection and implementation process, it is unlikely to switch provider. “Getting off a system is a major pain and a major cost, so nobody does it too quickly”, said Dean Chisholm, Asia Pacific head of operations at US fund house Invesco.
Implementation can be a lengthy process. There were 20 months between Thailand’s central bank announcing its selection of SimCorp Dimension and revealing it had gone live with the system in July last year.
Yet it is becoming increasingly important for institutional investors to have such a system in place, especially those looking to insource their portfolio management.
“If asset owners want to manage some money themselves, they’ve got to have something,” said Chisholm. “Most of them now want to manage money internally, at least the core portfolio; very few outsource everything. And … you’ve got to figure out how to bring the data together.”
In a decade’s time, it is possible that asset owners will be able to do more of this themselves. “It’s cheaper to build a tool today than it was five years ago, and I think it will be even cheaper in five years’ time,” said the SWF tech specialist. “I think more and more asset managers and asset owners will take the leap into building their own tools.”
But for now, even the biggest asset owners lack vast tech teams and will have to rely on third-party systems, said Mark Wightman, Asia-Pacific wealth and asset management advisory leader at consultancy EY.
For the time being major software providers will prioritise offering ‘open ecosystems’, which are likely to be cloud-based and can seamlessly connect with rival versions.
“The successful partners will be those who can open up platforms and architecture,” said Oliver Johnson, SimCorp’s managing director for Asia.
This trend has led BlackRock to develop Aladdin Studio, a suite of tools that let users customise the platform. Akiyoshi Takeuchi, Asia Pacific head of BlackRock Solutions, said the initiative had 3,000 ‘citizen developers’ using it and had been rolling out it to its external user community.
Tomorrow’s top asset owners will have access to flexible software systems that can support their increasingly complex portfolios. Aspiring investors had best buy in sooner rather than later – or get left behind.
This article has been adapted from a longer feature in the latest, 20th anniversary issue of AsianInvestor, which came out this month. Look out for further articles and analysis to come shortly on the subject of institutional investors' use of tech and data.