By Peter Hill, managing director, United Kingdom, Ireland & Middle East, at SimCorp
Multi-asset investing, while increasingly being employed to diversify holdings and boost returns, is facing huge challenges owing to technology shortfalls. Multi-asset managers, if they are to make well-informed investment decisions, and understand and manage risk and profit/loss across their portfolios, require unprecedented quantities and quality of information. However, many continue to operate on legacy systems, built for simpler requirements in simpler times.
One of the challenges with legacy technology is the lack of automation and consequent poor access to data. Use of legacy systems results inevitably in the proliferation of data silos, perhaps market, asset class or process-specific. Aggregating data from these silos into useful information on which to base multi-asset investment decisions is a difficult and error-prone task. Doing it in a timely fashion may well be impossible.
The key piece of technology required for multi-asset investing is an Investment Book of Record (IBOR). An IBOR delivers control over investment-critical information to asset managers by centralising positions across all asset classes, including cash, into a single version of the truth. It provides information, accurate to the second, about current, projected and historical positions, enabling portfolio managers and traders to make better-informed investment decisions. Crucially – and likely to be impossible to achieve using legacy systems – it includes not just today’s trades but all transactions and events that happen intraday away from the front office that nevertheless affect investment positions.
This is extremely important; a firm’s cash position, for example, will likely be affected by the pledging of collateral on a derivatives position. In a legacy system environment it is unlikely that a portfolio manager or risk manager will know about this pledge and its impact on investible cash until some considerable time later, possibly minutes, hours or even the next day. A similar, potentially more costly situation would arise if securities were used as collateral but then traded by the front office in ignorance of the pledge.
Uptake in the industry of modern, enterprise-wide systems that address such significant data challenges has been variable. There are enthusiastic adopters who have been prepared to invest in their businesses and prepare for growth. These are outweighed by laggards though: trillions of dollars in assets are still managed worldwide on legacy systems.
Moving off outdated technology onto new is not a trivial task and requires significant commitment. There will always be people in a firm in whose interest it is to maintain the status quo. And one reason may be that at the time buy-side margins have been squeezed, so tight technology budgets have been allocated to adapting to regulatory change. So ironically, regulation chiefly aimed at reducing risk may have hindered the adoption of technologies that would better enable the use of risk-focused multi-asset investment strategies.
The investment landscape has changed dramatically in recent years. Many instruments that investment managers view as commonplace today would have been considered exotic just a few years ago. However, the pace of technological change at many firms has not kept up with this evolution. Now that firms are doing more in multi-asset, perhaps they’ll focus on getting to grips with their portfolio risk using technology that makes it easier. Shouldn’t investment managers that have sophisticated investment strategies have equally cutting edge systems?