The power of technology: forward looking risk tools

The finance industry is slow in its willingness to innovate around technology, and is behind other industries says Jessica Donohue executive vice president, chief innovation officer and head of advisory and information solutions at State Street.

And the cost of that inability, or stubbornness, around technology innovation is not inconsequential.

State Street recently released its 2014 Data and Analytics Survey which analyses data analytics as a strategic priority for 400 investment organisations, including asset owners and asset managers.

The result is a clear divide in the industry between data starters, data movers, and data innovators.

The data innovators are treating data as their top strategic priority and are mastering a range of advanced data capabilities. They have the edge on electronic trading, extract commercial insight from their data and can adapt faster to business needs, the survey finds.

“Mastering data is both a huge challenge and opportunity for today’s investment organisations. Companies in the survey with the most advanced data practices believe they already have a significant competitive advantage. They can analyse risk and performance across today’s complex multi-asset portfolios. They have systems that streamline compliance and allow them to adapt to new stakeholder demands. And they have the flexible infrastructures and data skills to keep pace in a fast-changing environment,” the report says.

An important point between starters and innovators, Donohue says, is there is not a firm which doesn’t acknowledge it’s important, but the differences come from a firm’s ability to invest or elevate it to the number one strategic priority.

Donohue says the data innovators tend to be funds managers, not asset owners.

“This is no surprising because asset owners are more complex and have many sources of data. They also have tended to outsource decisions and data to managers,” she says. “Asset owners have also not had a commercial imperative to manage their data. But as they are trending towards self-managing their assets they are being pushed into solving their data problems.”

State Street believes that advanced data tools and practices will be one of the most powerful agents of change in the investment industry over the next 10 years, and Donohue also says it is a natural extension of State Street’s business to bring data to the front office, and plays to its strength in its back and middle office services.

Asset owners are starting to look seriously at the technology tools for a total portfolio view of their assets, partly because regulators are creating the imperative. But performance will, over time, be a driver as well.

“It’s hard to get a portfolio view, and a lot of asset owners haven’t required that from providers. But that’s just historical risk, even the most sophisticated investors and fund managers can’t do forward looking risk. There are a number of CIOs sitting without a full portfolio view of their risk. This should make us all sit up straight,” Donohue says.

State Street is taking technology innovation seriously, evidenced by the chief technology officer of the State Street GX Lab being located in Silicon Valley.

The GX Investment Labs convert State Street’s most widely followed research ideas into practical and interactive tools and include a Risk Lab, a Liquidity Lab and a Portfolio Lab.

Donohue says the over-arching aim is to create a platform that clients can use at any point in time and have a complete view of the entire portfolio and test ideas in real time.

“Imagine more willingness to trade because you know why you are trading and the risks involved. There is paralysis now because people don’t understand the risks so they stand still. Increased activity without productivity is not good, but more liquidity in the market would be great,” she says.

State Street has been using gaming technology to build the tools which will be open architecture and built in modules to accommodate technology upgrades.

“A big issue for the industry is it is full of black boxes instead of transparency. Quant models, pricing models, vendor data, they’re all black boxes. If you want historical prices you have to pay for it. It’s not free, I really don’t get that,” she says.

The system will allow investors to “preserve scenarios” so there is a record of back-testing which is good data governance.

“Governance and security of data will preoccupy people’s minds more,” Donohue says, “which is also an imperative to invest in technology. If you don’t know where or what the data is, then you don’t know it’s secure.”

Transparency is at the forefront of data analytics, she says, particularly given as a fiduciary, clarity is important.

“The healthcare industry has really embraced data and analytics and really moved the dial in a substantial way. Car companies now use chips in cars that are gathering huge amounts of data from things like movements in the steering wheel. They are collecting data to understand behaviour. The finance industry has real legacy system issues, but so did those other industries. We haven’t made it a priority,” she says.

Donohue believes the tools and innovation in finance will change with a generational change.

“They are used to visualisation and gaming technology and then they’ll walk into finance and expect to be able to use those tools. We are focusing a lot on dash boarding and visualisation. The next generation learns through graphics not spreadsheets.”

The survey asked the industry data questions around infrastructure, insight, adaptability, compliance, talent and governance. State Street aims to benchmark the industry with regard to data capabilities in these areas. It is also creating an APP so clients can benchmark their activities against the survey results.