Clive Davidson reports on a survey of investment programs

At a time of increasing competition and ever more demanding clients, investment organisations are not making the most of available information technology. On the other hand, the suppliers of investment software packages have been slow to respond to some investor demands, such as the requirement for more risk management functionality.

These are among the main findings of a recent report - Package Solutions in Practice: a survey of investment and treasury software - by DCE Research, the research arm of Netherlands-based DCE Consultants. It based its report on an analysis of the requirements and comments of around 60 UK and Dutch investment organisations and information from over 70 international package suppliers.

Investment organisations are increasingly turning to packages rather than writing their own software, says Leon van der Meer, director of DCE Consultants, based in Oxford. The cost of the software is not a big issue for these organisations and they often hire experts to help them install it, he says.

Investment organisations said that in addition to increased competitiveness and more demanding clients they faced a number of other challenges, such as the increasing importance of derivatives, the requirement to invest globally and to introduce product innovations more quickly.

These requirements have led to an increased focus on risk management functionality in software packages, as well as capabilities for the automatic straight-through processing" (STP) of transactions and a need for more sophisticated client reporting. Users said that the available software offered good client reporting facilities but still has some way to go in providing adequate support for risk management and STP.

DCE agreed with the users view that information technology could make only a limited contribution to the performance of investments "since the human factor is definitely pre- eminently important here". However, the company believes that investors are under-valuing the contribution that software can make to an investment organisation's reputation.

"Reputation, where it comes down to managing operational risk, management information, consistent procedures, adequate authorisation and ex-ception reporting, can be very strongly supported by information technology nowadays," says the survey.

The survey looked at over 70 packages and compared what they offered with what the users said they would like to see in their software. The packages ranged from comprehensive packages dedicated to investment to more general financial systems where investment functions formed only one module. The packages ranged from PC-based systems for small organisations to client-server systems for global operations. Most cost between £10,000 and £100,000 (Ecu14,000 - Ecu140,000).

The survey identified where the packages supported particular specialities such as property investment, private loans or unit trusts. It seems that the packages are meeting user requirements to a relatively high level in these areas. Around a third of users said that the available packages fully met their needs for private loans or unit trusts, with around 60% happy with the packages support for property investments.

Users told a different story for shares, bonds and options, however. In all three cases, users said they would like to see greater support for real-time compliance and more functionality for scenario and sensitivity analysis. The survey also noted that the packages' capabilities in real- time pre-trade compliance monitoring are generally much more limited than those in post-trade compliance monitoring. This is not hard to understand since real-time pre-trade monitoring requires a high degree of systems integration, good systems performance and sophisticated data handling, which can require good in-house technology resources to achieve.

Real-time compliance checks was just one of the requirements users listed for improvements with respect to functionality for options. Others included better valuation models, more support for new instruments, calculation of margins and order management. Against this, the survey noted that nearly 80% of the packages in the survey support options to some degree with nearly 70% offering at least some support for compliance monitoring, scenario analysis, margin calculations and position management.

Links between options and their underlying instruments are also a concern of users. "It is interesting to see that a link from the option to the underlying value is required more than the opposite link from the underlying value (shares and bonds) to the options" says the survey.

Users said they would like to see improved risk management functionality across all asset classes, with most concern not surprisingly in the area of options. Users said market and credit risk concern them almost equally. Less than half of the packages in the survey currently support value-at- risk, which has emerged as a key methodology for managing risk in the past few years. Other methodologies, such as gap and duration analysis, are better supported, however.

Nearly 75% of the packages offer some kind of risk management. But the survey notes that in most cases it is just one of many functions so the support tends to not be very sophisticated. The survey acknowledges that risk management is highly complicated subject and that it is unreasonable to expect any package to deal comprehensively with risk as well as everything else to do with investments.

"Specialised packages are likely to provide better solutions for risk management than all-round packages," says the survey.

Some investment software suppliers I&PE spoke to agree with DCE on this point. Lasse Meholm, managing director of Norway-based Tazett, which supplies a package that includes value-at-risk using either historical or Monte Carlo analysis, says that investment management and risk management are both highly complex and together are too much for most software suppliers to deal with adequately. Instead, he favours the development of international standards that would make the integration of specialised packages from different suppliers easier.

Other suppliers point out that they try to provide the functionality that their customers tell them they want, rather than what they think their customers might want in the future. So there is an inevitable gap between investors discovering a new requirement and the functionality becoming available in software packages.

Teri Geske, senior vice president of product development at Los Angeles-based Capital Management Sciences, says that the market has changed rapidly over the past 10 years, as has technology. Suppliers work hard to keep up and stay competitive but even in the best of circumstances software development takes time and lags the newest market developments.

In terms of technologies, most packages now will run on Windows NT or Unix or both operating systems and use a relational database. Many packages now have a client-server architecture, with PC clients for end-users and larger systems, often Unix-based, as servers.

The survey notes that as the packages get bigger and more complex and more central to an investment organisation's business, so they become more problematic to install. DCE recommends that organisations handle implementation with planning and care, with the involvement of top-level management.

DCE also looked at the market for packaged software for pensions. This market has been undergoing significant consolidation in recent years, it says in its report Package Solutions in Practice: a survey of pension and insurance software.

DCE has done surveys of this market together with the market for insurance software bi-annually since 1994. (There is a degree of overlap in pension and insurance software, with a number of packages offering some support for both areas.) DCE found that there are only half as many packages on the market now compared with 1996.

A number of suppliers have withdrawn from the market. Some of these were pension or insurance companies that originally sold software they developed in-house but have decided that supplying software is not a core part of their business and so have withdrawn their products.

The survey looks at around 30 specialist pension packages that are currently available in Europe. These offer a range of functionality at a range of prices. Users clearly have some choice, but need to exercise it carefully.

Details of the surveys are available from: Leon van der Meer at DCE, tel: +44 (0)1865 481429"