As active managers search for returns and value-added alpha within a dynamic market besieged by low (but rising) interest rates, buy-side firms also face pressures from increased regulatory compliance and transparency requirements. Structural market changes, the influx of digital technologies, shifts in investor buying behaviour and performance/costs perceptions have also contributed to the radical changes taking place across the buy-side.
Forward-looking investment management firms are searching for ways to outperform their peers. The firms that we see succeeding are executing based on a combination of focused business models, agile operational competency, and strong cost discipline, especially around core investment and risk functions.
This survey was conducted during a webinar Quantifi hosted, featuring Celent, on ‘Trends Shaping Portfolio and Investment Risk Management’. Over 100 individuals from across the buy-side industry registered for the webinar. The key findings are outlined below:
Which parts of the investment technology value chain do you see converging? Select 2.
The investment value chain is changing, triggered by regulation, emerging technologies and the digital revolution. As a result of these changes, there are specific areas within the buy-side ecosystem where convergence is taking place. To drive better investment decisions, firms are looking for technology that provides a consistent framework for multi-asset class analytics across front and middle office. Firms are demanding portfolio risk models/ analytics (71%) that are interactive, real-time and consistent enterprise-wide.
A number of firms use different tools for portfolio construction and optimisation. However, given the change in investment strategies, the technology used for portfolio construction is fast converging (38%). Firms that want to optimise across different assets, are in need of a solution that can converge across various asset classes and handle multiple strategies. New and emerging technologies, such as artificial intelligence (AI) and big data, lend themselves well to this requirement.
Which technologies would have the most significant impact on portfolio & risk functions in the next 5 years?
New and emerging technologies are introducing innovative risk-management techniques that help firms make better investment decisions faster, more efficiently and at a lower cost. AI/machine learning (72%) and big data (64%) are considered to be the key disruptors for the industry. The implementation of AI is well underway for many firms as they recognise that they need to adapt quickly or lose market share to more flexible and innovative competitors. The interplay between AI and big data is so connected that it can be difficult to separate the two. The effective use of AI largely depends on the scope and quality of data used to train algorithms, whilst without AI, insights locked within large datasets would remain undiscovered.
High performance (52%) is also high on the agenda. Technology advancements are causing firms to evaluate their existing, monolithic-based core architecture and look for alternative approaches that can provide high-performance for reporting, data processing and analytics. This trend towards optimising solution architecture has encouraged firms to select technology providers that have embraced cloud strategies to address performance, flexibility and agility.
What do you anticipate the main challenges for investment firms to be in 5 years’ time?
Whilst the global investment management industry has grown in recent years, the sector faces a number of challenges, with regulations (47%) and investment performance (33%) seen as the primary concerns. With MiFID II having come into effect in early 2018, new regulatory requirements are having a huge impact on the industry. In addition, new regulatory rulings will likely further complicate regulatory compliance in 2019.
The ability to generate alpha consistently is a key competitive benefit. In a market where competition is rife and alpha is elusive, it is no surprise that investment performance (33%) is a challenge. Firms are still likely to experience ebbs and flows due to low volatility environments caused by various factors including political risk i.e. the UK’s exit from the EU.
Modern technology is key to developing new capabilities to drive better investment decisions as well as regulatory operations.
What do you see as the most compelling business case for changing investment and risk management technology/ops?
Investment towards the use of big data, coupled with other emerging technologies is likely to have important implications for the investment management value chain. Technology providers, like Quantifi, continuously look for ways to deliver more sophisticated, accurate insights so that firms can exploit information for strategic advantage and alpha generation.
As the pressure to reduce operational costs persists, firms are looking for technology that offers cost-saving opportunities to mitigate margin pressures (26%). Firms realise that legacy risk management systems demand significant resource and capital to ensure operations run smoothly. As a result, firms have started to rethink their operating costs by leveraging next-generation technology that can add more value at a lower cost.