Asset managers are coping with constant regulatory and market changes in the current environment, as well as increasing pressure to demonstrate their active management skills, writes Virginie O’Shea, CEO and Founder of Firebrand Research. In this article, Ms. O'Shea explains how a solid data foundation enables firms to adapt and change as necessary to meet those changing requirements.
There has never been more scrutiny of asset management operations. If it isn’t the regulators assessing asset managers for everything from systemic risks to greenwashing, it’s their clients examining their ability to deliver differentiated active management against the rising tide of passive investments.
Competition is fierce and reputational risks are high. Performance rests on a firm’s ability to proactively assess its risks (client, market and regulatory) and take advantage of any opportunities, which is all dependent on clean, accurate and reliable internal data from across the firm’s various business lines and an increasing number of external providers, including market data and indices, to name just a few.
Buy-side chief operations officer (COO) delegates at the recent InvestOps Connect conference in London explained in panels and break-out sessions that data management is now at the heart of many of their wider digitalization initiatives. Firms want to move toward an environment of continuous improvement, where rather than struggling to keep pace with market changes, they are able to plug and play with new data sets as and when required.
Too much time is currently spent data wrangling and valuable staff resources such as data scientists are bogged down in non-value generating data clean-up tasks. Gathering data from across many different internal systems, aggregating it and ensuring it is fit for purpose shouldn’t take weeks or months.
Moreover, data silos remain a fact of life and they won’t be going away any time soon, if ever. Just look at the high levels of merger and acquisition activity over the last few years. In 2021, asset management M&A hit a 10-year high with 397 transactions and a total transacted assets under management of US$3.35 trillion. Deals were smaller in 2022, but activity increased to a total of 401 deals by year end, according to Piper Sandler figures.
The economic environment is also placing greater pressure on fund performance, so operational expenditure and operating models need to support lower total cost of ownership on an ongoing basis. Firms simply cannot afford to run manual processes for data clean-up because their teams don’t have the necessary resources. Automating as much as possible and providing centralized pools of data from which various functions can access required information is key to efficient operations.
A single accurate and trusted golden source of information can therefore empower business, technology and operations users to create their own applications, conduct business as usual and adapt to changing data requirements on the fly. An enterprise data fabric can sit between these pools of data to ensure that the data is fit for consumption by end users and the various systems they use; thus, connecting the data dots.Asset managers also recognize that data can be a differentiator for active managers. A mid-tier asset manager noted during a session at InvestOps that the data his business is demanding is increasingly varied and even the same data sets can be used for multiple end requirements. This means that a rigid relational database is poorly designed to meet business goals. These teams want to be able to organize the data as they see fit and combine client, transactional and market data to deliver new insights and uncover new market opportunities.
They may even want to run scenario modeling to test out new strategies ahead of time but using live data, without creating disconnected layers of data and introducing inefficiency via user-developed data silos. Rather than multiple, potentially conflicting versions of the same data, there is one hub that all end users from every function can access the information they require, when they need it.
Data is the cornerstone of efficient operations and asset managers will only be able to adapt to survive with strong foundations. They need to be accountable to their own end clients and responsive to their demands for more data. To this end, the institutional and retail asset owner community is demanding more transparency from their asset managers, especially when it comes to decision-making and fund governance practices. While this ties into the wider industry trend of environmental, social and governance (ESG) investing, it is a theme beyond investment strategies.Internally, asset managers need to have a good handle on why decisions were made and the provenance of the data that fed into those decision-making processes. Audit trails for the data underlying risk management decisions in volatile markets, for example, is necessary to support good governance and accountability. Given the popularity of ESG, even funds that don’t have the characteristics of a green or sustainable investment will be judged for poor governance. Reputations are being staked on a firm’s confidence in its data, after all the G in ESG means proving your firm has adequate governance in place.
It isn’t just the clients that asset managers need to worry about. Regulators have become much more preoccupied with the risks posed by the buy-side to market stability post-Archegos. Even hedge fund operations have come under greater scrutiny and regulators such as the US Securities and Exchange Commission (SEC) have put forth proposals to further improve transparency in the sector with amendments to Form PF. Regulators are demanding more frequent reporting about everything from liquidity to derivatives positions, all of which requires, you’ve guessed it, reliable and increasingly granular data across a whole range of areas.
The current regulatory focus on retail shareholders, post-Gamestop, has also led to real pressure on firms to demonstrate that they are delivering good outcomes for their clients and properly matching products to risk appetites. The Consumer Duty requirements in the UK, the tweaks to the Markets in Financial Instruments Directive (MiFID) in Europe and the ongoing focus of the SEC in this area will compel more and more asset managers to invest in their client data as well as their investment data.
Asset managers are also under immense pressure to diversify into new asset classes as opportunities arise. However, branching out into these new asset types means dealing with a wider variety of data sets, some of which are considerably different from their traditional sources of market data. Firms must become more agile at onboarding these new data sets quickly and without placing a greater burden on their operational or technology staff. Currently, it can take months to fully onboard a relatively new, structured data set due to IT and data management staff bottlenecks.The move into other asset classes often also means a new way of operating, which means more data silos. This could be moving from equities into fixed income or it could be moving into supporting more esoteric asset classes. These new lines of business are sometimes culturally and technically segmented from each other, with separate teams and technologies to handle real estate versus private equity, for example.
Buy-siders at the InvestOps conference noted that alternative asset classes tend to require bespoke operating models and new core asset management systems for support. Even those firms working toward a consolidated vendor footprint have to make concessions. Current front-to-back asset management systems are generally slow to add required functionality for these asset classes, which means new systems are required and there are more silos for the buy-side to manage.
As one InvestOps panelist noted, your data strategy is never finished, but there are now tools and technologies out there to help firms deliver on their intentions.
One such product is Data Fabric Studio with asset management module. It is fully managed cloud-native, next generation software that enables asset management firms to create a single source of truth to support multiple internal and external stakeholders and use cases with consistent, current, and accurate data.
Asset managers are coping with constant regulatory and market changes in the current environment, as well as increasing pressure to demonstrate their active management skills. A solid data foundation enables these firms to adapt and change as necessary to meet those changing requirements.