Portfolio-Manager Workflow: Past to Present

Terry Flanagan

Portfolio workflow is entering a new era of innovation after being on the sidelines of recent advances in front- and middle-office technology. Partly due to diminished patience with information lag times, portfolio managers are getting better-detailed and more holistic portfolio analytics much more quickly than in the past.

“Ten years ago it was common for the middle office to create and push reports back out to the front office monthly,” said Stan Kwasniewski, Senior Vice President, Senior Director, Strategic Business Unit Operations at FactSet. “Now we’re moving to near real-time delivery of that information. As soon as the middle office can measure and quantify something, they want to get that to the front office.”

Today, portfolio managers see the same data their trader and risk-manager colleagues are seeing, which enables more effective collaboration toward the enterprise-wide goal of generating alpha.

Tracy Wolfe, FactSet

“Portfolio managers are demanding more information, with the perspective of historical analysis,” said Tracy Wolfe, Senior Vice President, Senior Director, Strategy at FactSet. “They’re focused on understanding how the portfolio is changing throughout its life cycle, as opposed to just monitoring the trade life cycle. They are asking ‘How can I consume data in a reconciled, cleansed way, throughout the day?’”

Several decades ago, bringing an investment manager’s front and middle offices together via a harmonized experience of similar technologies, data, and analytics wasn’t a realistic option because the front office as we now know it didn’t exist.

According to a 2017 LinkedIn blog post written by Ryan Chidley, a trader at APG Asset Management, in the 1980s and earlier, portfolio managers often submitted trade orders to brokers directly. PM workflow changed in the 1990s when legal and compliance impetus to centralize interaction with public exchanges and brokers gave rise to the buy-side trading desk.

Chidley outlined the workflow that emerged during that time (at least in equities trading) as follows: the PM decides what to buy or sell, the PM creates a trade order, the order is sent to the buy-side trading desk for execution, and finally, the desk executes the order. This sequence ossified in the 1990s and most of the asset-management industry still uses it more than two decades later.

However, this is changing as institutional trading becomes more strategic, Chidley noted. One underlying change that is facilitating seamless PM workflow is in communication, where meetings and emails are being supplanted by on-demand information procurement.

Stan Kwasniewski, FactSet

“We have seen a shift over the past 10 years toward sharing information through digital means—less on a ‘push’ basis and more on a real-time, ‘pull’ basis,” Kwasniewski said. “PMs can log into their front-end interface to get information that traditionally would have been sent to them in an Excel attachment.”

“You’re also starting to see a lot more use of chat systems and natural language reporting, where you’re communicating in the context of the application you’re leveraging, as opposed to sending an email and having a disconnected communication that points you back into an application,” FactSet’s Wolfe said.

Consultative Approach

“Since the modern generation of buy-side trading technology and portfolio-management technology, there are dedicated tools for each person, but for the most part, workloads have been disjointed,” said Spencer Mindlin, Capital Markets Industry Analyst at Aite Group. “The lines of demarcation connected either via FIX between internal applications, or APIs, or FTP files—batch jobs at the end of the day that feed what’s going on from one team to another. Now tools have been created to not only allow the buy-side trader to trade better, but also to communicate information on what he or she is doing back to the portfolio manager. It’s a more consultative approach.”

Not surprisingly, spend numbers in this era of workflow convergence illustrate that technology is a growing focus for portfolio managers. In a report published in the second quarter of 2018, Greenwich Associates noted that risk and analytics platforms (including the risk tech that is especially important to portfolio managers) comprised 10% of buy-side trading desk budgets for the year, up from 6% in 2017,

According to the Greenwich report, while Bloomberg, Excel, and internally developed software are most commonly used for risk tech, many buy-side firms reported problems with their current systems stemming from a lack of flexibility. As a result, investment firms are increasingly making the move to third-party systems.

The business of institutional investing is less about security selection and more about managing the risk/reward profile of the portfolio over time than is commonly perceived. As a result, the buy side is pouring money into risk management.

The Greenwich report noted an elusive ‘Holy Grail’ in the investment business, which it defined as a single, integrated workflow that allows execution, order, portfolio, and risk data to seamlessly flow around the platform to help whoever needs it at any stage of the investment process.

“Tools for different asset classes have converged, as have tools for the front and middle office in a lot of cases,” FactSet’s Kwasniewski said. “So whereas It used to be equity vs. fixed income, and front office vs. middle office, it’s now multi-asset class and one-size-fits-all. Or at least that’s the direction things are headed.”

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