Technology Will Determine Buy-Side Winners
Investment management firms executing plans with emerging technologies may separate themselves from the competitive pack next year according to the Deloitte Center for Financial Services.
Deloitte said in a new report, 2019 Investment Management Outlook, that the buy side has been under pressure for a number of years and spent a lot of time developing plans and strategies. The study said: “2019 may be the year that some firms innovate and emerge through the execution of bold actions.”
Paul Kraft, US mutual fund and investment adviser leader at Deloitte & Touche, said in the report: “Now is the time for investment managers to develop plans with a two- to five-year horizon to match the changing state of play and win investors of the future.”
The consultancy said investment managers are exploring new alternative data sets to drive organic growth through differentiated alpha generation.
Dirk Manelski, chief technology officer at Pimco, told Markets Media this year that asset managers who can quickly integrate and analyse both market data and alternative data will have a competitive advantage. Manelski said his priorities include cloud migration, digital transformation and “data, data, data.”
He added: “While these are the big change agenda items, priorities always need to include investing in our portfolio risk and analytics platforms.”
In another use of alternative data, Citywire reported that BlackRock’s systematic active equity team will be using a range of sources, including earning calls, internet traffic and satellite images, for a new fund range.
“Artificial intelligence has graduated from a buzzword to an enabler that offers differentiated capabilities across the investment value chain,” added Deloitte.
The study also gave the example of Morgan Stanley combining machine learning algorithms with predictive analytics to help its 16,000 financial advisers generate customized advice for clients. The algorithms are designed to browse through research reports, diverse data sets, and news articles to generate insights for future investments and to understand the potential impact of events on client portfolios.
Valentijn van Nieuwenhuijzen, chief investment officer atDutch fund manager NN Investment Partners, attended a Unicom conference on AI and sentiment analysis in finance this year which focused on how new sentiment data can drive stronger investment results and which new tools can extract the relevant information from sentiment and alternative data.
He said afterwards in a blog: “How it can be applied will vary across asset classes and market segments, and it will always be done in an adaptable and research-driven way. But it will be done, and I am convinced it will become an increasingly important driver of investment returns in what will be a more data-driven future, a future where smart digital augmentation of our human investment skill will prove to be a key differentiator.”
In its investment processes NN IP already uses Marketpsych’s sentiment indices, which utilise AI to constantly score the news and other media and extract meaning.
Deloitte warned that firms that do not invest in growth, operational efficiency, and customer experience risk becoming the inorganic growth fuel for firms with more efficient and effective platforms that yield higher profitability. As a result many investment managers are hunting for strategic acquisitions and minority stakes to add new markets, product offerings, and investment capabilities. This year there have been more deals larger than $1bn than in any of the previous five years.
For example, this week BlackRock Digital Wealth announced a strategic relationship with Envestnet to enhance the investment technology solutions they provide to financial advisors and acquired an equity stake in the provider of intelligent systems for wealth management. Both firms noted that the future of advice will be more digital and more comprehensive.
Venu Krishnamurthy, global head of digital wealth for BlackRock, said in a statement: “As wealth managers shift to fee-based advisory relationships, they are asking for new technologies to help them scale their business and build better portfolios.”
The Deloitte study noted that the fast-growing exchange-traded fund segment has seen a wave of acquisitions in the last few years. For example last year Invesco announced the acquisition of Guggenheim Investments’ ETF business for $1.2bn.
“The acquisition may help Invesco on two fronts – complementing the existing self-indexing capability and expanding global ETF market share,” added Deloitte.
In April this year WisdomTree Investments, the US ETF provider, completed its acquisition of ETF Securities’ European exchange-traded commodity, currency and short-and-leveraged ETF business.
Jonathan Steinberg, chief executive and president of WisdomTree, said in a statement: “The acquisition immediately adds scale, diversification and profitability to our business in Europe – the second largest ETF market in the world – and adds overall strength and resources to WisdomTree globally.”
The firms have an exclusive partnership to explore the delivery of data advisory services.
Enterprise Access Point, the firm’s web-based data marketplace, now includes over 60 third-party providers.
Deal combines Knoema’s knowledge management platform and data repository with Adaptive’s alternative data.
AI and machine learning have supplanted trading speed as a differentiator for capital markets firms.
Focus areas include listings, ESG data, and sustainable bonds.