Scoping the tech revolution: The future of fund selection
That information technology is the life blood of the financial services sector is no secret. The capital markets would not function without IT, nor increasingly would investors be able to access services that are going online.
There are myriad examples of the value of IT to the industry. Last year a local paper in Buffalo, New York State, reported that BlackRock was going to build a new data centre in nearby Amherst for a reported $80m, following approval of $9.2m in tax
breaks by the relevant local development agency.
Existing tools as used by fund selectors can also be somewhat valued: one blog on the CFA Institute website published early last year suggested that there were some “315,000 subscribers each paying in excess of $20,000/year” for their Bloomberg platform, while the number of subscribers to Thomson Reuters Eikon was put at 190,000.
These price levels naturally draw in competitors – such as Infront and ChartIQ – for those who do not need the full power of a physical terminal.
But there are other issues to consider.
One study by marketing agency Dog Digital found that marketing professionals in financial services struggle to communicate the importance of technology and digital marketing to senior management and company boards.
Thus, while the industry keeps evolving and automated labour seems to be increasingly more an option for companies, many believe there is still a long way to go.
The Generation Y effect
Philip Kalus, managing partner, accelerando associates, the intelligence provider for fund distribution, is one of them.
Working with fund managers and fund selectors across Europe, Kalus notes that selectors have become acquainted with the use of technology on the operational side of their job, but the potential future value lies in tech based communication and information flow between the fund manager and the fund buyer.
broader and deeper use of technology and media compared to a couple of years ago, but it is very early stage in comparison to some other industries. Fund selector due diligence processes have not changed very much yet. However, they will. Technology and specialist B2B social media based factors will become very important in fund and fund manager selection,” he says.
While it tends to present itself as a very modern sector, the asset management industry lags considerably behind many others when it comes to the use of technology, Kalus argues.
Many asset managers even fail to transmit the most essential information such as factsheets in a timely and easy-to-find manner, while the real challenges go beyond this.
“We already see Generation Y research and buying behaviour moving into the corporate world. Just think of the importance of social media in corporate staffing, travel or event booking for example. We will see this in fund selection as well,” he adds.
Positive changes
Detlef Glow, head of Lipper EMEA Research, Thomson Reuters also uses technology every day as part of his job to screen funds in a fully automated way, for example to calculate the monthly Lipper Leaders rating. He sees a future full of positive changes.
“The use of technology will increase over time, as it helps to increase efficiency in all parts of the investment industry.
“With regards to this, we will see a lot of changes over the next few years in all parts of technology – faster processors and networks will enable asset managers to run new, maybe better, models and react even faster on short term trends – think about flash trading, which was enabled by fast processors and high speed data networks,” he says.
Another reason why technology is destined to be a key theme of the investment universe going forward is, according to Glow, the increasing push of regulatory changes in the industry. New requirements for transparency, documentation or steps
within the process of advising a client that will force asset managers and advisers to use new technologies.
Mark Hawtin, investment director at GAM and manager of both long only and long/short technology portfolios, says he uses technology in order to maintain monitoring of company reports, and arrange company meetings. Hawtin suggests that one possible development is technology that facilitates studies of how portfolio managers’ behaviour and environment correlates to the portfolio performance – for example seeking to find a relationship between performance and how much sleeep a portfolio manager gets.
The selector view
Gianluca Piacenti, head of Advisory Fund Solutions at Pioneer Investments, suggests that it is not totally clear how technology may come to affect the selection process.
“In my opinion technology plays an important role in fund selection activities in terms of screening in a world that is growing fast and it is important to focus just where there is value and invest in the right way in qualitative analysis that is fundamental for final assessment.”
“Moreover, given that investment processes are evolving, another point of interest should be style analysis for preliminary and backtest analysis.
“It is really difficult to understand how technologies are evolving to support fund selection activities. From my point of view this depends on the fund selection process preferences. Regulations are evolving but I guess that this will have an impact more on the compliance side than on pure fund selection processes.”
Lars Hamberg, portfolio manager at Aktiva Fonder Asset Management in Sweden, says that new technology has the potential to simplify business intelligence for both portfolio managers and fund selectors.
“It is firstly about different Big Data tools, which facilitate decision making by sifting out the essential from a continuously growing flow of information. There we see a very interesting development of ever more advanced tools and methods,” he says.
This will in turn affect how investment analysis is consumed and, perhaps more importantly, how investment analysis may come to be produced in a fragmented way.
“There is a lot of focus on the latest tools for predictive analysis, with the help of large sets of data, and the results are promising – in our opinion. We have evaluated new predictive analysis methods that depend on machine reading all published text on the internet in real time, so called Big Data analysis and self learning text analysis. The machines interpret the text and from this signal whether to buy or sell different asset classes. It is about analysing in real time amounts of data that are beyond human cognition and thereby obtain superior information out of open data sources.”
Hamberg says that this type of development raises questions about how and when players with unique and proprietary information may enter the asset management industry.
“Think, for example, that a company such as Google can in real time always guess how optimistic or pessimistic the inhabitants in your town are – just by analysing what the inhabitants are searching for. Are they searching for information about unemployment support, or do they all seem to be hunting for a new car? Assume you aggregate all such data concerning all types of emotional states. Who has the best information, for example, about consumer confidence? How will an opinion institute/pollster be able to assert itself? Who will care about what a several days old telephone survey has to say?”
“Certain players believe that there is a big barrier against Google quickly taking market share in the asset management industry. We believe the contrary, that Google is ideally placed for online asset gathering. This particularly applies to the younger generation that has grown up with Google and uses Google every day.”
Cultural shift
The way data is consumed also suggests a cultural shift between generations in terms of how they may use technology to obtain access to financial services, including asset management.
Younger investors are more likely to be used to going online to find solutions. They are used to comparing offerings online, and will not want to pay a premium to an older asset management firm with oak panelling on the walls, Hamberg warns.
A company such as Google is one of a number that he sees acting as unique and superior intelligence repositories with potential for alpha generation. Facebook is another.
“The one that continuously has the best information will win. Of course the industry is stressed by the threat from certain technology giants. It is possible that we will see alliances and structural deals and it is clear which ones currently seem to be holding the trump cards.”
“Suppose, however, that the competitive landscape changes dramatically. What can an asset management organisation do to position itself? One obvious course of action is to embrace the new technology in order to obtain one’s own superior information to trade on.”
“That is also our own course of action. We will start using the latest tools within Big Data predictive analysis in our process shortly. It’s an open race and everybody can become a winner, except – of course – those who remain asleep.
| Tech trends
The way technology is consumed is set to undergo further changes in 2015, according to trends outlined at the recent Consumer Electronics Association conference in the US. Wearable technology is estimated to reach unit sales of over 30 million this year, even as unit sales growth of tablets starts to mature. Mark Hawtin, investment director at GAM, follows these types of trends in his role overseeing long only and long/short technology funds. Among the key trends he has picked out include developments affecting mobile devices and the so called ‘internet of things’, which relies on sensors facilitating networking of devices through the internet. |
| The Google example
Aktiva Fonder’s Lars Hamberg has outlined evidence suggesting established asset managers should be concerned about technology firms, in this case Google, entering the asset management space – including a related job ad. What really sets Google apart in its foray into the financial services industry are its advanced analytics capabilities from Google keyword search volume to advanced satellite imagery that could be leveraged to predict macroeconomic and company trends, which could ultimately be applied to developing highly advanced investment strategies. But Campbell Fleming, chief executive of UK fund house Threadneedle Investments, asked how easily large internet groups would be able to penetrate the fund market. “Google would find the fund management market more difficult than it thinks. There are significant barriers to entry and it’s not something you could get into overnight,” he has said. A senior executive speaking at a private meeting of fund professionals at the FT said her “biggest fear” was search engine giant Google deciding to enter asset management. “We could see the Apples, Googles or large retailers of the world becoming the next big powerhouses in investment management.” “Gonzalez disagrees with bankers and analysts who think the Internet giants won’t enter a highly regulated, low-margin business, and says that banks that are not prepared for such new competitors will be terminated.” “As a member of the Asset Management team, you will contribute to the continued success of Google’s investment portfolio while helping to build the processes and systems to build a scalable Asset Management organisation.” |
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