Initiatives that the buy-side should keep top-of-mind when it comes to technology include alternatives processing, front-office capabilities and consolidated record-keeping. Five considerations that especially deserve attention include:
While industry analysis shows that operational improvements in the back office can contribute anywhere from 50 to 250 basis points in realized portfolio performance, performance is no doubt most often linked to the investment decisions made by portfolio managers in the front office.
With the dawn of new regulation, front-office functionality, particularly pre- and post-trade compliance capabilities, that links seamlessly to the same data being used by back- and middle-office compliance and reporting solutions is becoming more and more of a technology investment must.
Additionally, systems that are able to provide portfolio managers intraday positions and exposures necessary to best inform investment decisions will continue to be extremely important as firms look to IT investments that will not only help them remain compliant, but ultimately drive investment performance and increase alpha.
Silo Elimination; IBOR Investment
In line with the increasing need for front-office solutions that operate on trusted, fully up-to-date position data, an underlying Investment Book of Record is crucial in order to ensure data consistency across a business. In 2013, many firms began to consider the implications caused by data siloes sitting in disparate systems, yet few actually took action.
With more than 40 percent of respondents to a recent SimCorp poll admitting they have no confidence in the data they use, 2014 must be a year of further change. The risk of wrong decision-making based on incorrect data is simply too high to continue being ignored.
As the industry looks to expand further into new asset classes, test new investment strategies and increase portfolio performance, an Investment Book of Record is critical to success. A solid IBOR delivers numerous benefits by serving as a single source of truth and common denominator for both front- and back-office users. With a single IBOR, buy-side firms are able to gain a holistic view into intraday assets and exposures.
Effective and Efficient Derivatives and Non-Traditional Asset Class Processing
As the buy-side continues to place emphasis on derivatives as an integral part of a number of investment strategies, technology that is capable of supporting and processing complex derivatives is incredibly important. Effective and efficient derivatives processing requires a system that is able to not only process derivatives, but also the underlying assets from which they derive. While many legacy or stand-alone solutions offer workarounds for derivatives and other non-traditional asset classes, today’s demands require consolidation of multiple systems in order to streamline processes, maximize efficiency and eliminate complexity and risk.
In the New Year, buy-side firms should instead evaluate a multi-asset class system that automates front-to back-office workflows on a single platform. Streamlining investment processes throughout the trade lifecycle on a single platform will accelerate time to market for even the most exotic instruments. Additionally, systems that focus purely on a single asset class such as derivatives lose a 360 degree view of the firm’s assets and exposures across the entire portfolio.
Further focus on regulatory compliance
Legislation such as Dodd-Frank, EMIR and Solvency II will continue to impact buy-side IT spend in 2014 as the need for accurate views of exposures across counterparties, collateral and the underlying derivatives continues to be a priority. These are capabilities that can only be provided by a solid IBOR.
Buy-side firms must look at regulatory compliance with a view to improving enterprise architecture rather than creating a web of individual solutions regulation by regulation.
Pensions and Insurance IT spend
While typewriters, walkmans and VHS tapes have long been left behind, millions if not billions in pension assets are still managed on legacy systems that existed before Windows 1.0. In addition to the billions of pension dollars at risk, insurance firms have also been operating far too long on legacy and outdated technology.
Over the course of 2013, gears began to turn as pension and insurance firms under increased pressure to increase alpha realized the infrastructure barriers created by fragmented technology. Continued regulatory scrutiny and an ever-changing marketplace should lead both pension and insurance firms to dedicate budget to IT updates in order to remain competitive in today’s landscape.
Many buy-side institutions have started building business cases and taking the necessary steps towards selecting and implementing critical IT system updates, but there is still much work to be done. Last year, a study released by SimCorp StrategyLab, a private research institution sponsored by SimCorp, reported the troubling statistic that one in four buy-side firms worldwide run core business operations on legacy systems. Given that the top 2,000 firms collectively manage upwards of $80 trillion in assets, trillions of dollars are at the mercy of outdated technology. With this in mind, the initiatives discussed above are sure to gain additional steam in 2014 as recently stable markets have firms searching for new ways to improve business operations and continue increasing alpha via state-of-the-art technology.
David Kubersky is the Managing Director of SimCorp North America. As head of SimCorp's North America operations, Mr. Kubersky oversees the company's go-to-market strategy and geographic expansion in the region. He is a member of SimCorp’s Global Management Committee. Having brought a tremendous amount of in-market experience to the Managing Director position in 2008, the number of SimCorp North American clientele has more than doubled, revenues have risen four-fold and the region now generates a healthy profit margin.