The past two years—rather than the 1990s or early 2000s—will go down in history as the time when the Internet finally started disrupting the asset management industry.
No, really. The industry is 20 years late.
When it comes to tracking portfolio performance and making investment decisions, at least some players in finance—including institutional investors and asset management firms— still party like it’s 1995. They use siloed data that lives in Excel spreadsheets and on shared drives. Aggregating and standardizing data remains a tedious, unglamorous, back-office task.
But now, techies are building financial technology startups offering easily searchable, cloud-based data platforms aimed at improving portfolio management.
“Disruptive companies compete along an angle that the established companies dismiss as a toy,” says David Teten, a partner at New York City-based ff Venture Capital. “When [Vanguard] was first launched, people said, ‘This is totally ridiculous: who’s going to pay money to someone to just match the market?’ ” And we all know what happened next.
Powered by Excel
But the Internet still hasn’t transformed all aspects of asset management.
“Portfolios are becoming more complex, and technology has not kept up. It’s quite discouraging if you’re a technologist coming in and seeing the state of the infrastructure powering all this complexity,” says Joel Beal, a vice-president at Addepar, a Silicon Valley startup.
Addepar, in which ff Venture Capital is an investor, sells cloud-based software, allowing portfolio managers to see all their holdings data—including transactions, exposures and net-of-fee returns—across all asset classes in one place. It even displays alternatives data, something some systems can’t handle.
A lot of Addepar’s customers— including endowments, foundations, funds of funds, advisors and family offices—were dependent on Excel.
“A lot of people have built their own custom solutions, and usually there’s tons of work in Excel,” Beal explains. “We did a survey of our client base, and the most frequent product they were moving off of was Excel.”
Justin Zhen discovered a similar reliance on spreadsheets when he started working on Wall Street a few years ago. As a hedge fund analyst, he found valuing companies involved updating data manually and emailing spreadsheets back and forth. A friend who worked at Goldman Sachs at the time noticed the same flurry of Excel update emails during earnings seasons.
So, in 2013, the two started Thinknum, a data platform for valuing companies. Today, Thinknum’s customers include asset management firms, pension funds and other institutional and retail investors.
The platform lets portfolio managers test how different scenarios, such as extreme weather or volatile oil prices, could affect company stocks, Zhen explains. And it does it without the use of spreadsheets. Plus, since the platform’s in the cloud, multiple users can work on the same financial model without having to email one another updates.
Thinknum also pulls non-financial information, such as the number of social media followers and Facebook check-ins a company gets within a certain period. Zhen says this data can be important for assessing companies because there’s a big correlation between social media presence and revenue, especially for consumer companies.
“Right now, investors try to look at financial data to see whether a company is cheap,” he says. “On the Internet, there’s data that lets you think about companies on a different level.”
Zhen and his partner aren’t alone in what they discovered while working in finance.
The international State Street 2014 Data and Analytics Survey—which polled 400 senior executives at pension funds, endowments, foundations, sovereign wealth funds, funds of funds, insurance companies, central banks and supranational institutions—classified almost a third (27%) of respondents as data starters, organizations that didn’t take sufficient advantage of emerging data management technologies.
These organizations had siloed portfolio information and used separate platforms to track different asset classes. This process gave them a fragmented view of their portfolio holdings and limited their ability to analyze performance and risk. All of this meant they had a difficult time changing investment strategies. Another 36% of respondents were categorized as data movers. While they still had data gaps and errors, they’d made some upgrades, such as data visualization and improved data integration across different asset classes. The upgrades allowed them to perform partially integrated performance and risk analysis in individual asset classes.
The third group (37%) were data innovators. Their data was integrated, high-quality and traceable-back-tosource. This gave them a complete view of risk and performance across different asset classes, as well as the ability to stress-test their portfolios and more easily change investment strategies.
The survey showed asset managers were more likely to be data innovators than asset owners such as pension funds. In fact, almost half (41%) of the participating pension funds were classified as data starters, whereas 38% were classed as data movers and only 22% were deemed data innovators.
$379 Tip for a $70 Meal
So why is the industry disruption happening now?
First, thanks to tech solutions that lower administrative and overhead costs, it’s cheaper and easier to start a company. And, in some sectors, venture capital dollars are flowing—U.S. financial technology startups attracted $12 billion in investments last year, compared with just $4 billion the year before.
Further, says Teten, the asset management industry is ripe for disruption. He points to unhappy investment customers who complain about paying high fees for which they don’t believe they get enough value.
Of course, it’s hard for money managers to consistently beat the markets, which means they underperform quite often. When those managers outperform, they collect a base fee plus a performance fee; but when they underperform, they still collect the base fee. In a 2013 article he wrote for Forbes, Teten likened this reward structure to receiving a “$379 tip for a $70 meal.”
Asset managers, of course, know their customers are unhappy with paying high fees. They also know their privileged position isn’t as strong as it used to be. A different State Street poll—the 2015 Asset Manager Survey of 400 senior executives in asset management firms worldwide—finds 79% of money managers expect new competition from non-traditional market entrants such as technology firms.
Still, money managers remain focused mostly on their traditional rivals, explains Rob Baillie, CEO of State Street Trust Company Canada. “It’s more of an emerging risk,” he says, adding it’s early to talk about disruption.
That might explain why, when discussing how they’ll respond to the changing competitive landscape, none of the Asset Manager Survey participants voiced plans to invest in technology upgrades.
Instead, they said they’d mainly expand distribution networks and launch new products, such as liquid alternatives and multi-asset solutions.
And 46% said they were evaluating acquisition targets. For example, BlackRock recently bought robo advice firm Future Advisor for an undisclosed sum. (BlackRock didn’t respond to an interview request.)
“The trick is what happens postacquisition,” Teten says of the deal, explaining established companies can find it hard to incorporate disruption. “It’s difficult for a large company to acquire a disruptive company and let it flourish with a different business model.”
Barry Benjamin, a Baltimore-based global asset management leader at PwC, expects more consolidations. In the short term, that could reduce options available to institutional investors in certain investment skill categories, he says. “If that happens, my guess is there will be new entrants that will fill those gaps.”
As more new entrants crop up worldwide, it will be harder for asset managers to justify their performance and fees, Benjamin explains.
Plus, greater availability of portfolio management data might make even institutional investors lose some of the patience they’re known for. “I could see clearly where some [pension] trustees may look for more performance in the short term than what they’ve been willing to accept in the past,” he says.
Yaldaz Sadakova is associate editor of Benefits Canada. firstname.lastname@example.org
Get a PDF of this article.