5 Challenges Investment Managers Face in Diversifying Their Asset Class Offerings
Low Yield Environment Drives Growing Demand to Diversify Asset Class Offerings
It’s fair to say we’ve enjoyed a bond bull market for many decades, but with interest rates near all-time lows, investors are questioning their traditional asset allocations. Asset managers are seeking out less traditional asset classes and taking a different approach to portfolio construction, moving away from the traditional 60/40 split, to gain those valuable basis points of performance, customize portfolios to match client goals, and retain their competitive advantage.
Traditional portfolios face outperformance by peers if they don’t diversify into other asset classes, and many asset managers have already made a move into these new asset classes, using derivatives for alpha or hedging purposes or investing in emerging markets. However, in doing so, they must ask this fundamental question – does their existing technology support these new asset types? Adopting new asset classes can require a significant technological investment, and some of the major challenges we see facing investment managers looking to adopt new asset classes stem from the systems they operate on.
Technology Challenges Facing Asset Managers Adopting New Asset Classes
1. Selecting a Multi-asset Technology Platform
The technology landscape has changed, and firms have more technology options today than in the past. There’s no longer just one “best-of-breed” system for each asset class or business area. Technology innovation has spawned a proliferation of new specialized vendors that are very good at what they do as well as many more “integrated,” “all-in-one,” or “front-to-back” solutions, which can provide a great breadth of coverage, but may fall short compared to “best-of-breed” systems if there are limitations in certain areas, like trading or compliance.
Whether you go with best-of-breed, all-in-one, or some combination of the two, you need to be able to seamlessly connect your data and systems into a single investment experience. Look for extensible APIs, interoperability, and systems that feature off-the-shelf connectivity options for your trading and other partners. The best all-in-one systems have the flexibility to hook into more specialized providers if you want to use them. Going all-in-one today shouldn’t limit your ability to integrate best-of-breed tools in the future.
Additionally, your system should be built with the technical underpinnings to rapidly innovate and enhance features and functionality and the flexibility to scale with you as you grow. Keeping these features in mind as you select your multi-asset class investment system can save you the cost and hassle of switching systems down the line.
2. Stepping Away from Automation & Increased Cost of Operation
Most asset managers spend years automating and refining automation of business-critical workflows to improve speed-to-market for new investment decisions. If your current system cannot support a fully automated end-to-end workflow, taking on additional asset classes can introduce new, labor-intensive processes, an increase in operation costs that COOs and CTOs can’t justify unless it’s significantly outweighed by additional fund performance.
Although fear of hindering automation holds many firms back from trading less traditional asset classes, this doesn’t have to be the case. With a technology solution that offers strong out-of-the-box asset-class coverage and flexibility in customizing workflows, you’ll be able to more seamlessly adopt new asset classes and standardize workflows across your firm while still being able to customize them to your needs with ease. This type of solution will cover the asset classes you’re trading today as well as have the flexibility to grow with you as you adopt new asset classes in the future without impacting or interrupting your daily workflows.
3. Increased Market Data Costs
The cost of market data is no doubt one of the largest third-party costs for asset managers. And with margins at an all-time low, there is less budget available for external market data costs. With differing market data providers for each asset class and different data types required by PMs, traders, and risk, most asset managers have been through at least one data optimization project in the last decade, if not more, to move their organization to a central market data platform with governance in place.
But in failing to introduce new asset classes for fear of incurring additional market data costs, firms run the risk of falling behind in terms of differentiation. To combat this, managers should seek out a data provider that offers optionality, so you are only paying for the data you need and none that you don’t.
4. Assessing Risk for Decision Making
Managing downside risk has never been more important than in the current environment. With existing solutions often focussing largely on traditional asset classes, the pre-trade decision support tools available are often limited to basic modeling/what-if analysis of a single asset class. Investment decision-making is hard enough when you’re focusing on a single asset class, and introducing the likes of derivatives and commodities makes portfolio analysis and having conviction in your decisions substantially more challenging.
As such, when diversifying asset classes, managers and risk analysts need to ensure that pre-trade analysis and insights are actionable. Exposures need to be calculated quickly and on the fly, and your order management system needs to be flexible in terms of data aggregation and simulation of new positions across all asset classes.
To react quickly to market movement and corresponding events, managers need configurable analytics views built directly within their modeling tools, so the analytics they need are always at their fingertips.
5. Satisfying Investor Mandates
The past few years have brought about many changes in investment management practices and best practices. One example of this is a new standard of compliance. Today, investors have even more heightened awareness and expectations in terms of risk and compliance.
Managing multiple asset classes across disparate systems or relying on manual workflows leaves room for error when it comes to compliance. Especially once you take on additional asset classes, operating on legacy platforms or utilizing manual compliance processes, like Excel, will not suffice.
Ideally, investment managers will build out an institutionalized compliance structure that simplifies the process with automated pre-, intra-, and post-trade alerts. Tight integrations and streamlined workflows across systems should allow for heightened transparency and mitigated risk, while configurability and automated alerts will allow you to have confidence in your trading decisions and ability to meet investor mandates. Additionally, your compliance tool should be flexible and built to scale alongside your firm, regardless of what asset classes you choose to trade down the line.
Market Leading Technology Supporting Asset Managers Through Persistent Low Yield Environment
In today’s low-yield environment, asset managers are faced with many challenges to their business. Diversifying asset classes whilst managing downside risk and staying ahead of the competition is no easy task. Ensuring you have the right technology partner in place to manage your changing business could be the key to gaining those valuable basis points of out-performance. To see how SS&C Eze can help your firm overcome the challenges you face in diversifying your asset class coverage, learn more about Eze OMS.