On 2 February 2018, global stock markets suffered their first serious bout of the jitters for some time. The Dow Jones Industrial Average fell 665 points to end the day down more than 2.5 per cent as the market reacted to a potential interest rate hike by the US Federal Reserve. The volatility continued, when, on 5 February, the FTSE 100 fell 3.5 per cent during the day before recovering to end the session down 1.9 per cent.
The contagion spread to Asia, with Japan’s Nikkei 225 index falling close to 5 per cent and the Hong Kong Hang Seng index falling 4.9 per cent.
It is during these periods of volatility that a well-diversified portfolio can provide investors with much-needed downside protection. According to Goldman Sachs Asset Management, the current environment, with a risk of the US economy overheating, a dynamic approach to asset allocation is needed. One that uses an equity strategy that looks beyond the major developed market benchmarks and a fixed income approach that seeks returns outside of developed market government and corporate bonds, they suggest.
Asset managers are seeking ways to respond in kind to investor demand for multi-asset strategies, not only to protect them against future volatility but to find new sources of alpha.
Operating in this multi-asset world is not necessarily that straightforward. As Roger Woolman, Business Development Director, Asset Management & Alternatives at SS&C Advent, points out, while adopting a multi-asset approach offers opportunities for growth, supporting the more complex portfolio management requirements involved creates considerable technical and infrastructure challenges.
All too often, says Woolman, firms’ existing systems simply can’t handle the new asset classes.
Part of the problem is that investment firms have tended to operate in silos, with different investment teams covering individual asset classes. Over time, this has led to the creation of a multi-tiered IT infrastructure, with disparate systems being used for different asset classes.
As firms look to develop greater multi-asset strategy capabilities, it calls upon them to try and consolidate their systems.
“Some of the emphasis today is on asset managers having to diversify their asset class coverage to satisfy investors,” says Woolman. “To do that, you’ve got to make a business case and start a new investment strategy.
“We’ve seen it happen quite a lot among fund managers who decide to operate in illiquid asset classes. Firms who diversify into PE, RE, loan products and such like, perhaps don’t have a system that suits these illiquid asset classes. Their systems have been designed and built to trade in highly liquid areas of the markets, not necessarily to support more illiquid asset classes.”
Multi-asset portfolios are, by their very nature, complex to monitor because of the sheer range of financial instruments spanning FX, rates, global equities, commodities and fixed income. This requires technology tools to support scenario modelling, risk management, transaction cost analysis, and collateral and financing optimisation across a broad array of instruments, transaction types and currencies.
“An IBOR infrastructure able to deliver accurate data in near or real-time so managers can easily aggregate positions and view exposures. As well as multi-asset performance attribution capabilities to meet asset owners’ growing calls for detailed performance analysis,” observes Woolman.
Dipping the toe
Asset managers will typically feel their way in and steadily build a multi-asset strategy rather than attempting to re-invent themselves overnight. As they dip their toe in, and expand the breadth of financial instruments, they seek to rely on existing systems. This is fine over the short-term but as firms become more ambitious and move into multiple new asset classes, the demand for data management, aggregation, portfolio attribution and reporting grow exponentially.
This places added pressure on their IT infrastructures, leading to operational inefficiencies, increased overheads and a growing inability to service clients properly.
“We often see similar problems arise following an acquisition or merger,” states Woolman. “Acquiring expertise in target markets is a fast way for firms to build up their multi-asset capabilities. Often though, you end up with two different businesses, each using different systems and all of a sudden, where you thought had created efficiencies you’ve ended up inheriting inefficiencies – perhaps one system is being used to support listed securities, another for swaps, another for bank loans and so on.”
This is not a case of asset managers being blinkered. They know that relying on multiple systems is less than ideal but often it simply comes down to a case of ‘needs must’. Ultimately, they have to be seen to be responding to investor expectations and keeping pace with market evolution.
Indeed, the multi-asset world is really just part of a much bigger picture of blended activities with respect to firm types, asset classes, active versus passive management, liquid and illiquid trading in ‘hybrid’ funds being pursued by hedge fund and PE managers and so on. This blending or convergence trend has become an important trend in recent times.
“It’s not always about knowing what you need, it’s about finding the best solution. The SS&C Advent platform has proven its worth in the multi-asset arena for many years. Geneva® is widely used by global fund administrators as well as asset managers because of its multi-asset capabilities,” says Woolman.
That gives some comfort to asset managers who are facing a crossroads and deciding the best path to take. Do they embark on a large internal project to integrate all their systems or do they find something that simplifies and rationalises the operation and also potentially in an outsourced capacity?
Sustainability to support future growth
Whatever the decision, sustainability has to be a key objective.
In other words, an integrated, front- to back-office platform, with rich multi-asset and multi-account functionality that provides position-level detail and allows firms to view all their exposures across their entire book of business.
“There is a scaling aspect to the future integration of systems; you’re only as good as your weakest link. Even if you succeed in connecting two disparate systems, it doesn’t mean you have a scalable and robust solution.
“Another angle to sustainability is how assets manifest and how products evolve and change. To accommodate that future-proofing element, asset managers need to have a certain approach to architecting a system and how assets are created on that system.
“As an asset class’s characteristics change, or an entirely new asset class is created, we don’t have to build something from scratch. We look at how that asset works, how it behaves, and we use an object-based approach to define it and accommodate it on the Geneva® platform,” explains Woolman.
Integration is an enabler
A single integrated platform to support true multi-asset strategy capabilities may not be a panacea, per se, but it is certainly an enabler.
Without an agile system infrastructure, asset managers face continued operational pressures when trading new assets and instruments. And with so much regulatory compliance to contend with, the more firms can achieve a complete overview of instrument positions, risk levels, collateral and margining levels etc., the more adept they can become at satisfying both regulator and investor expectations.
“I do think enablement is the key to this.
“The ability to react quickly when things change and knowing that you have a system that can accommodate new strategies can be quite empowering from an investment perspective. If different market opportunities are being presented, you want to be able to act on them, to be agile.
“This quicker time to market can make an asset manager more competitive and become proactive rather than reactive,” concludes Woolman.
To learn more about technology for asset managers, see globalassetmanagent.tech
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