Research unbundling – Technology to the portfolio manager’s rescue

Weee Skytrain! 1

A recent study by Deloitte Center for Financial Services finds that investment management firms which adopt emerging technologies may separate themselves from the competitive pack as soon as next year. Alternative data seems to come first, then AI, NLP and ML, indeed, there are a whole host of acronyms promising investment firms an exciting future ahead.

In the real world, regulation rules. This year, MiFID 2 research unbundling has transformed the lives of many European investors, but the more agile of investment firms have had a defining opportunity to turn operational burden into performance gains. Before reality plays catch up with AI investing, “operational alpha capture” anticipates the mutation of discretionary investing. A new information infrastructure for portfolio managers will emerge with technology playing a significant role into 2019.

From information push to pull

What is the main challenge with investment research unbundling? In a nutshell, access to it.

Under MiFID 2, an avalanche of factors have reduced and reversed the information flow. The more evident reasons are that research budget restrictions have forced fund managers to lower their number of providers or receive degraded services. Sell-side's commercial models are complex, often very different and opaque. The discovery of new alpha sources is even harder. Compliance departments have banned promotional materials to avoid inducement. If a new research provider makes it onto the portfolio manager’s radar, the regulatory trial period of three months is inadequate to assess its value [1]. More recently, sales people, key conduits of market and research information, are being made gradually redundant.

Effective tools to manage research are missing too.

In a bundled world, Outlook was the research management solution (RMS) of choice. Clearly, this was far from perfect with limited search and collaborative functionalities. Emails worked previously because they provide a single point for consumption of subscribed and unsubscribed providers pushing information towards the user. Research sales make calls, and so do portfolio managers. They interact extensively with analysts up to several times a day.

Since January, email inboxes are nearly empty. Top brokers have unanimously locked their valuable content within password-protected research portals –a somehow bizarre strategy considering their ridiculously low pricing. Portfolio managers must maintain numerous logins and passwords. Occasionally they just give up on accessing tortuous portals. This information fragmentation comes on top of the existing data vendor portals or the more recent aggregators and marketplaces.

Portfolio managers under-consume pre-paid interactions because of a lack of real-time visibility on their calls or meetings’ tracking. At best, analytics come quarterly, in separate formats per provider. Data is often inaccurate. In some cases, the sell-side race to interactions volume to attract larger research payments creates defiant behaviors and harm long-standing business relationships.

You are not alone

Almost a year into MiFID 2 and the image of the isolated portfolio manager is fading.

One positive effect of MiFID 2 agreed by all investment firms is the rationalization of research consumption. Provider selection logically involves every portfolio manager in a process looking for the best possible consensus. The ultimate decision is now in the hands of firms’ CFOs and some providers have inevitably been cut off from their historic end clients.

Selecting also means a regular evaluation process. Brokers’ votes have been adapted to value research at a more granular level, putting extra work load onto the portfolio manager. He must make sure that the tracking of calls and meetings is consistent with the analytics provided by his brokers. Interactions payment is the biggest part of the research bill. Most firms have added new internal policies and workflows. Equally, because it is now a cost, research information must be leveraged. More collaboration discipline is required and expected. Attendees of conferences or meetings must report and share new knowledge with their teams in a timely fashion.

The portfolio manager’s role is morphing and increasingly integrated with his immediate and non-immediate environment: his colleagues and management.

The Technologist

Our portfolio manager is being asked to do more with less.

More efforts to access less information, more time to select and evaluate providers to justify their use, more control over budgets and and actual consumption, increased sharing of knowledge in a more systematic and collaborative way.

Without technology to support these additional and demanding tasks, there is little room left for him to fulfil his essential role: investing. The good news is that radically new solution offerings are available. The enablers are well known: information digitization, cloud-computing and ubiquitous internet access. The value of these new applications resides in automation but also condensing several work tasks into one. For instance, consuming a report in a dedicated application for portfolio managers means (1) inducement risk is implicitly ruled out (2) the content has already been filtered to his interests (3) his reading automatically generates consumptions analytics (4) sharing it with colleagues is one-click away, and so on. Modern technology lays in the functional design. It adapts to simultaneously solve the users’ productivity and the firm’s operational requirement.

In information-intensive industries, incumbents’ software vendors are going through a new paradigm. Historically built to automate large companies’ workflows, software starts now from the end-user. The reason is straightforward: people are task-, not process-oriented. They want an outcome no matter how it is come by. If a solution is more than 10-year-old, there is a good chance that it is enterprise-wide with numerous capabilities implying lengthy and costly implementation. The product vision is top-down whereas new entrants think user-first, all the way up to the management needs. They also understand a firm’s new buying criteria:

  • Solving one problem only

  • Rapid set-up

  • User-friendly

  • Cloud-based

  • Cost-effective business model

The portfolio manager is central to the new digital equation. Investment firms keeping a technological status quo are at immediate operational and regulatory risk. Helping the portfolio manager’s daily work with the right tools will enable the emergence of new work habits. It is the first step to adapt firms’ organization towards the future of active investing.

But first things first: invest for your human capital now to secure your seat for the data revolution ahead. 

[1]MiFIDVision”, an initiative bringing together players of the investment management value chain in France has made the proposal to extend the trial period to six months.