The sky’s the limit
This complex array of global market conditions – with technology as its key enabler – along with current business trends in Europe, have transformed the software market for portfolio management and asset allocation into a booming industry, with no end to the boom in sight.
The fact is, as these market conditions have evolved in recent years, so, too, has the need for more sophisticated fund management models supported by more complex software. The evidence is overwhelming. The software market is growing at a brisk annual rate of 19%, and currently enjoying $165m in yearly spending.
The euro has had a major impact on investment management, both in Europe and globally. Until recently, the European asset manager followed fluctuations of currency values, inflation, and economic and political climates when developing strategic asset allocations. Today, the single European currency has shifted investment management from national and currency-based to sector-and index-based.
Instead of currencies, the merits of individual companies and of vertical market sectors such as ‘e-technology’, ‘e-retail’ or ‘e-telecoms’ largely determine asset allocation. Sparked by the emergence of pan-European sector-based indices such as Standard & Poor’s, MSCI, the shift to sector-based considerations also demands new software applications to facilitate effective fund management in this changing European and global economy.
Another trend in the market is real-time trading, as T+1 and Straight-Through-Processing (STP) technology continue to evolve rapidly. This more volatile trading arena has made risk a greater priority for fund managers, in both their medium- and long-term investment approaches. In effect, the real-time environment has created the demand for more sophisticated and frequent reporting, and thus the applications and technologies to meet this demand.
Global market conditions have changed the rules. The more complex the business environment, the more sophisticated are the techniques required. New fund management models demand more complex software elements utilising algorithms and maths models that traditionally were used in front-office trading models. As the financial industry evolves and more complex risk applications develop, technology’s role is changing from that of a tool to an enabler in the capital markets.
Take, for example, four areas of asset allocation – real-time portfolio management, strategic asset allocation, tactical asset allocation and stock selection. For each, technology is critical. For portfolio management, many of the new key tools are algorithmic. These multi-factor models enable asset managers to perform strict asset allocation based on complex mathematical and statistical models and optimal portfolio compositions based on queries from the internet.
Asset allocation system vendors supply applications of varying complexity for this market.
Sophisticated systems offer multi-risk models designed to simulate and analyse competition as based on the quality of their econometric designs. The more elementary systems calculate returns, decomposing and balancing them with risks. These applications are simpler tools, yet provide treatment for a large number of portfolios.
Further technologies are applied as a window to worldwide product selection. They enable enhanced asset allocation through better understanding and access on diversified networks. Given the non-stop global market, new technologies providing time zone management have been developed.
Given this state of the world, it must be said that the European market is not yet mature. Many large firms have realised that using in-house resources was not
sufficient to develop the kinds of complex software packages needed to meet these challenges.
As a result, a number of large firms purchase off-the-shelf packages and adapt them to niche markets and specific requirements with reduced life cycles. The trend has been to implement standard packages with a high degree of openness, and facilitate integration to various middleware and niche needs. Firms are looking for generic position-keeping systems to perform order management and allow for development of specialised in-house performance measurements, risk management and reporting needs.
The reality, however, is that most large firms rely on in-house software technology to manage portfolios. According to Tower Group, some 45% of the firms that manage over $5bn (e4.9bn) rely mainly on in-house software. But, a significant number of smaller firms do not possess the means to develop their own systems. The solution for them is to rely on application-outsourcing services via the internet. Some examples of this are the internet’s role as a window to access information, process information and obtain value-added services. The bottom line is this – the market potential for these services, as well as the software, is vast.
Farzine Fazel is a managing principal in business control at The Capital Markets Company, London