Fintech Gains a Footing with Asset Owners

Art by Armando Veve

When Rens Goetz, head of asset management for Swiss-based multinational firm ABB, was reviewing the strategy of its Swedish pension fund—one of the 100-plus plans he manages within the $10 billion fund—he saw a mismatch between the board’s perception of required returns and actual needs.

“They were focusing too much on the regulatory requirements, which made them think that everything was fine and they didn’t need to take any risks because there was not really a reward to that risk,” Goetz says.

Predictive modeling in ABB’s financial technology laid out scenarios showing the shortfall in the current policy and recommended portfolio changes. Eventually, the board agreed to the new model, which increased risk exposure but also improved the portfolio’s diversification while showing the same realized volatility as its lower-risk portfolio. Goetz says the new policy has delivered an additional 0.90% to 1% return for about the last six years.

The tools in the GLASS platform from Ortec Finance helped Goetz quickly run scenarios with real-time data and glean analytical insights unavailable by simply using Excel spreadsheets.

“We were able to give the board a forward-looking reference frame. It really helps create an understanding of what the sensitivities are of the fund to potentially improve, and whether or not the fund is sustainable through time,” he says.

Fintech has made significant advances in the past decade, able to handle bigger volumes of data faster, and tools like artificial intelligence (AI), machine learning, and data mining can provide deeper analytical research and insights for asset owners. Established and startup financial technology firms say their software will save asset owners time, reduce errors, and improve returns.

Asset owners who want to invest in advanced fintech platforms need to think about what problems they’re looking to solve first, as it’s easy to get caught up in sleek-looking demos. There are many options, from software that has specific applications to end-to-end systems that handle all business aspects.

What fintech does. At their most basic, the advanced fintech platforms create central depositories for data, digitizing information that is in paper form, pulling in information from custodians, asset managers and others, and making it transparent and accessible to the whole team.

Monel Amin, founder of DiligenceVault, says her firm’s platform does away with the dependency on paper, documents with unstructured data, and emails. Instead, requests are digitally created on the platform, and both allocators and asset managers have access in a central location.

The platform makes information accessible since data is in a structured format, allowing collaboration while building an audit trail. Users can build workflow automations “to eliminate the manual grunt work,” she says.

With central repositories, information is entered once, and data can be shared whenever parties need to see it, says Chad Erwin, senior vice president, asset owners at Backstop Solutions Group. New information is added in the repository, eliminating back-and-forth emailing. Additionally, with all of the information centrally located, knowledge isn’t lost when a team member leaves.

Many fintech providers are multi-asset platforms that can pull data from all providers—custodians, asset managers, and others, and present the information holistically and in real time. Depending on the platform, they can serve as the investment book of record, such as Backstop.

“We tie in the qualitative and quantitative aspects of their portfolio where they can see all of their positions, all of their underlying allocations, rolled up in one,” Erwin says.

How some allocators use fintech. Some asset owners said they sought their fintech providers because of faster computing and access to advanced data science. Charles Wu, deputy CIO and general manager for defined contribution investments, SAS Trustee Corp. (STC), also known as State Super, a A$43 billion Australian pension fund, says the technology has helped State Super distill insights from large amounts of information in hours compared to weeks using conventional methods.

Wu says calculating pair-wise correlations across the large amount of data in Excel would take months, compared to just hours in Python. “It is challenging for Excel to handle computational heavy tasks” he says. 

Zhuoying (Joy) Xu, vice president of strategic asset allocation and fixed income at Verizon Investment Management Corp. (VIMCO), a $18 billion pension fund, says she uses Mcube Technologies for running a tactical overlay program for the pension fund, where she can go long or short for each asset class.

“I can see what the actual performance of the model is itself, pinpoint which model has been adding value or not, and in what manner. It really helps me deal with tons of data in a very timely manner,” she says.

Both Goetz and Xu say their respective platforms have boosted returns. Goetz says in aggregate, GLASS-supported dynamic asset allocation has increased returns by 0.2% since ABB started to use it about six years ago. While that doesn’t sound like much, “if that’s on a $10 billion portfolio, that’s a significant amount of money, spread over six years.”

Xu says the system has added 50 basis points of alpha in the 10 years she’s used Mcube, and the program gives VIMCO a negative correlation with its benchmark. More importantly, Xu says, the overlay program has helped her avoid drawdown. In 2015, when VIMCO’s emerging markets benchmark index fell 14.9%, and its active manager lost 14.2%, the overlay portfolio helped mitigate losses.

“Because we can go long and short the indices, we underweighted the emerging markets beta, and at the end of the year, the combined active manager plus the portfolio overlay in that particular asset class lost only 2%,” she says.

Rob Robie, executive vice president, head of analytics and trading at FactSet, says having both the information on portfolio performance and portfolio risk is a key benefit to having data for all asset classes in one place. “You get to understand the profile from multiple angles,” he says.

Pain Points

Jeff Levi, principal at Casey Quirk, says when asset owners are looking at a fintech provider, they need to think about pain points they want to address, rather than first talking to providers. “There are a lot of options out there and it’s very easy to get lost in the forest if you don’t have a map of where to go,” he says.

Some fintech providers focus on specific applications that can work with current software programs, whereas others try to be a “one-stop shop” to handle front and back office needs, and those might not work with current software. “Be very thoughtful about the suite of tools that you’re going to put together,” he says. “We’ve seen a lot of firms use one-off systems to bridge gaps and it can create a spaghetti-like infrastructure.”

Susan Veksler, co-founder and president of Caissa, says it’s seeing interest from asset owners who want a platform that can give real-time investment and performance analysis on traditional assets, but also alternatives like private equity. Caissa has analytical tools for the investment team, as well as functionality to support the organization’s operations team.

“The systems allocators were using before didn’t really have a good way of handling the transparency of alternatives. Instead of using benchmarks to proxy less-transparent investments, Caissa makes full use of any types of transparency information available, such as data from investor letters and manager fact sheets and incorporates it into a total portfolio analysis,” she says.

Josh Smith, CEO of Solovis, an end-to-end platform that can keep track of the organizations front and back office operations, says real-time data capturing across multiple sources reduces data errors that result from outdated information. Solovis does projection modeling and liquidity modeling on alternative investments to forecast how cashflows, exposure, and risk affect asset owners’ overall portfolios.

“These are very important factors to think about as you’re making decisions because you’re effectively locking your capital up for up to 15 to 20 years,” he says.

Xu says fintech has superior modeling and data visualization tools for portfolios versus Excel, and helps to prevent the typos and other errors that are easy to make in Excel—and harder to catch.

Predictive modeling using AI is a promised benefit of these systems. Troy A. Paredes, founder of Paredes Strategies and former SEC commissioner, says we’re still in “very early innings” with these technologies regarding their applications and potential. With new technologies can come new and different risks, he says, and there will be questions regarding how to make sure we understand what’s necessary to make them work how we want them to. “That’s all part of the process,” he says.

Although these platforms can save time and assist in the investment decision making process, there are things they can’t do. Wu says the platform helps State Super view and construct a more resilient portfolio, but he won’t rely on it blindly.

“Numbers tend to give you a false perception of precision. Technology enables us to process more information and I’ll potentially look at information in a different manner. Ultimately, it comes back to how we make the investment case because, at the end of the day, our end client is our members and our board, and I can’t just outsource that to technology,” Wu says.

Editor’s note: 
Rens Goetz of ABB, Zhuoying (Joy) Xu of Verizon, and Clint Coghill of Backstop Solutions will be speaking on a panel, moderated by Shawn Wischmeier, chief investment officer of Margaret A. Cargill Philanthropies, titled: “Improving Returns with Strategic Asset Allocation and Technology” at our CIO Summit on May 16.  Register here to join one of the most robust CIO thinktanks of 2019.