Shoot the breeze with your average head of technology at a multi-billion dollar investment-management firm about their portfolio-management system and they will probably rattle off geologically-sounding adjectives like core, base or bedrock. Without such a system--it can be deduced from such conversations--you might as well stay home, forget about your clients, and hope the market has a good day because you really shouldn't do any trading.
"The bottom line is that if the system has problems and the availability's not there--it's like the sun not coming up in the morning," says Dave Seibert, vice president of investment systems at T. Rowe Price, an asset-management firm handling around $180 billion. "The portfolio managers live and die by understanding what their positions are, what they have to spend, what they have to invest--that's what they need to trade, so that's the key."
Critical to any discussion of portfolio management systems is establishing exactly what the term does and does not include. According to Rob Hegarty, director of investment-management technology research with TowerGroup, (a Massachusetts-based consulting firm focused on the impact of information technology in the global financial services industry) portfolio management is all about the back office, encompassing portfolio accounting and performance attribution. Outside the realm of portfolio management systems, explains Hegarty, is front-office functionality such as trading, analytics and decision support.
Hegarty describes the average trading process for an asset management firm: Every morning, portfolio managers get a report listing the securities and cash in each of their customer's portfolios. From that information, they are, able to discern whether, in light of the investors risk tolerance, goals, or fund mandate, they need to initiate buy or sell orders. Analytics come into play from a number of systems, after which orders are generated and executed by the firm's trading desk or through a broker. Often large chunks of stock are then allocated across multiple portfolios, which requires keeping the broker and custodian informed of exactly what needs to go where.
"Portfolio accounting is really keeping the books and records of the firm," Hegarty says, "it's just keeping track of what customers are holding what assets and what securities--and which securities are in which accounts--by creating accounting records." Subsequently, performance attribution is the process by which the return on an investment portfolio is attributed to its manager's investment decisions, measured by analyzing stock selection, asset allocation and market timing.
Everyone in the asset-management business has their own description of what portfolio management systems comprise and Blair Kanter, principal consultant with the investment management and capital markets consulting (IMCAP) group at PricewaterhouseCoopers, who has followed developments in investment-management technologies for over a decade, is no exception.
"Portfolio management systems function as the core repository for having information on all holdings and positions--everything across all product lines--and provide information to portfolio managers for decision making purposes, provide the data necessary for calculating performance and provide the ability to generate client reports and statements," he says.
So, how does a firm know if it's performing all these tasks efficiently? How does a chief technology officer know when it's time to be shopping for a new system? Analysts and investment-management professionals say that one of the first ways is the most obvious--determine whether or not a current system is meeting your demands.
Are there investment products it cannot support? Can it handle all fixed-income securities and produce complex reports required by insurance companies who invest? Can it handle products that the firm would like to offer its clients in the future? Is it up to the challenge of a global environment and can it handle different currencies? Does it operate in real-time, making it viable in a T+1 world (the deadline for firms to execute, clear and settle trades in one day)?
If the answer to any of these questions is no, it's probably time to hit the market. Right off the bat, however, firms are confronted with another question--to buy or to outsource?
One of the major trends in the area of portfolio management, says Hegarty, is towards outsourcing back-office functionality and reallocating those funds to activities where firms can more directly differentiate themselves in their clients eyes, such as investment advising and other forms of personal interaction.
With portfolio management systems generally ranging from one to nine million dollars, smaller firms may deem outsourcing their only viable option. As Hegarty explains, going without a system will soon be no option at all. "Anyone who is not on a system when T+1 arrives in 2004, is not going to stay in business," he says.
For those smaller firms, the lifeline offered by an application service provider (ASP) or service bureau to handle their portfolio management may be essential. However, before entering any agreement, says Hegarty, concerns about information security should be addressed with the potential provider. "What you don't want to happen is trust your data to another source and then something happens to it," he says, "meaning backups weren't taken or data is corrupted and they can't recover." At the other end of the spectrum, large firms are getting into the business of being those ASP or service bureau providers of portfolio management technology for their smaller competitors. With $330 billion in assets under management, Northern Trust is planning to embrace such a model.
Recently, with the guidance of Cutter Information Corp., which provides information technology (IT) advisory and consulting services for firms throughout many industries, Northern Trust purchased a portfolio management system. Behind the move was the desire to consolidate a number of different systems into a central platform for portfolio management, to ensure consistent data across all products. Additionally, the company was also looking to upgrade its technology to ensure GSTPA (the industry's global straight-though-processing initiative focused on cross-border post-trade and pre-settlement matching) connectivity and fluid T+1 processing.