Buyside Automation An oxymoron? John Wilson Partner, Folio Partners [email_address]

Agenda Buyside - background Why do we care about automation – its performance that matters? What’s expected and what’s the reality How did we get here? How do we get out of here!

Buyside - background

Why do we care about automation – its performance that matters?

What’s expected and what’s the reality

How did we get here?

How do we get out of here!

“ Reports of my death are widely exaggerated” “ City boys face extinction..within a decade” – IBM Report “ There’s no doubt [City] jobs will be lost to sophisticated computers” – Michael Snider, City of London Police

“ City boys face extinction..within a decade”

– IBM Report

“ There’s no doubt [City] jobs will be lost to sophisticated computers”

– Michael Snider, City of London Police

Buy-side Background “ Buy Side” today includes Traditional institutional managers (Active & Passive) Hedge funds*

“ Buy Side” today includes

Traditional institutional managers (Active & Passive)

Hedge funds*

Alternative Investment Market AIF $1.26tn in 2005 (20% growth) v ETFs$487bn (16.7% growth) Source: Watson Wyatt

Buy-side Background cont Revenue and cost pressures Increasing bias towards performance fees Switch of “active” fees to passive “fees” Staff compensation structures under pressure in traditional firms High fixed costs – IT + Staff Greater mandate specialisation – providing some fee relief Dependent on more complex instruments to assist “alpha” Increased scrutiny on performance and execution quality Clients themselves under intense pressure to generate returns e.g. BA plc; min 6% return req’d v bonds(4-5%) & equities (3%) Regulatory changes e.g. MIFID Business consolidation/fragmentation will increase

Revenue and cost pressures

Increasing bias towards performance fees

Switch of “active” fees to passive “fees”

Staff compensation structures under pressure in traditional firms

High fixed costs – IT + Staff

Greater mandate specialisation – providing some fee relief

Dependent on more complex instruments to assist “alpha”

Increased scrutiny on performance and execution quality

Clients themselves under intense pressure to generate returns e.g. BA plc; min 6% return req’d v bonds(4-5%) & equities (3%)

Regulatory changes e.g. MIFID

Business consolidation/fragmentation will increase

Why automation should matter to the buyside Greater productivity More rapid processing Scalable, volume insensitive business Increased process transparency Real-time information for managers Enforced segregation of duties Process measurement More effective use of multi-skilled costly workers

Greater productivity

More rapid processing

Scalable, volume insensitive business

Increased process transparency

Real-time information for managers

Enforced segregation of duties

Process measurement

More effective use of multi-skilled costly workers

The Dream Investment Process Settlement & Accounting ETC / ETS Order Generation Pre-Trade Compliance Decision Support Price Discovery Auto Execution Auto Recs Performance Attribution Portfolio Valuation Order Management Client Reporting

Buyside IT facilities Buyside technology 3-5 yrs behind sell-side Exceptions exist, particularly in some hedge funds Automation is patchy despite P&L pressures Silo solutions in place, not multi-asset

Buyside technology 3-5 yrs behind sell-side

Exceptions exist, particularly in some hedge funds

Automation is patchy despite P&L pressures

Silo solutions in place, not multi-asset

Automation reality - Equities Bars indicate relative automation levels Order Generation Pre-Trade Compliance Decision Support ETC / ETS Auto Execution Settlement & Accounting Auto Recs Portfolio Valuation Price Discovery Performance Attribution Order Management

Automation reality - Bonds Order Generation Pre-Trade Compliance Decision Support ETC / ETS Auto Execution Settlement & Accounting Auto Recs Portfolio Valuation Price Discovery Performance Attribution Order Management

Automation reality - ETD Order Generation Pre-Trade Compliance Decision Support ETC / ETS Auto Execution Settlement & Accounting Auto Recs Portfolio Valuation Price Discovery Performance Attribution Order Management

Automation reality - OTC Order Generation Pre-Trade Compliance Decision Support ETC / ETS Auto Execution Settlement & Accounting Auto Recs Portfolio Valuation Price Discovery Performance Attribution Order Management

Buyside IT facilities cont Result Competition, Client and Regulatory fears Tension between IT & Users Causes Attitudes - Awards for best performance, not best IT Availability of solutions Appreciation Affordability By comparison to other industries, elements of fund management are woefully manual, even amateurish

Result

Competition, Client and Regulatory fears

Tension between IT & Users

Causes

Attitudes - Awards for best performance, not best IT

Availability of solutions

Appreciation

Affordability

Buyside spending IT Budgets Expenditure is attempting to buttress old applications whilst trying to shoehorn new instruments into the environment

“ Were finding that 40% of our budget is going towards keeping infrastructure current. The business is not seeing a benefit from that routine maintenance” Bob Sibley, senior infrastructure architect, HBOS Infrastructure costs are partly crowding out automation investment, (as are market data costs) This is one cause of tactical local solutions becoming common place, aside from users frustration and immediate needs Result - Patchwork quilt with constant repairs!

“ Were finding that 40% of our budget is going towards keeping infrastructure current. The business is not seeing a benefit from that routine maintenance” Bob Sibley, senior infrastructure architect, HBOS

Infrastructure costs are partly crowding out automation investment, (as are market data costs)

This is one cause of tactical local solutions becoming common place, aside from users frustration and immediate needs

Result - Patchwork quilt with constant repairs!

Progress towards automation Scary place Uncoordinated, manual Infrastructure, a lways involving Microsoft Office, especially Excel More Efficient but shaky Tactical IT infrastructure with limited automation Managed and consolidated IT infrastructure with some automation. Hard to add instrument deviations Processes substantially automated and dynamically adapt for new instruments Business Enabler Strategic Destination

Process Culture Optimisation Reactive Ad hoc Problem-Driven “ Removing paper” Easing pain New instrument or mandate driven Reactive Tactical IT Request Driven Change Management and Planning “ Keeping It Running” Proactive Accountable Increased Monitoring Formal Change Management SLA’s Improvement Predictability “ Quality Driven” Proactive Optimizing Costs and Quality Agile Self Assessing and Continuous Improvement “ Taking The Lead”

Reactive

Ad hoc

Problem-Driven

“ Removing paper”

Easing pain

New instrument or mandate driven

Reactive

Tactical IT

Request Driven

Change Management and Planning

“ Keeping It Running”

Proactive

Accountable

Increased Monitoring

Formal Change Management

SLA’s

Improvement

Predictability

“ Quality Driven”

Proactive

Optimizing Costs and Quality

Agile

Self Assessing and Continuous Improvement

“ Taking The Lead”

Instrument profile OTC Equities Bonds ETD

Automation opportunities Data Marts Business Processing Client Teams Corporate Actions/ Voting Client Reporting/ Performance Transition Management Data Management Compliance Research Consumption Modelling Transactions Middle Office Front Office Back Office

What’s our anticipated solution? Components accessed singly or collectively, in multi-tenanted environment Subscription based SAAS offerings Browser based

What is SaaS? www.wikipedia.com Software as a Service ( SaaS ) is a model of software delivery where the software company provides maintenance, daily technical operation, and support for the software provided to their client. SaaS is a model of software delivery rather than a market segment; software can be delivered using this method to any market segment including home consumers, small business, medium and large business.

www.wikipedia.com

Software as a Service ( SaaS ) is a model of software delivery where the software company provides maintenance, daily technical operation, and support for the software provided to their client. SaaS is a model of software delivery rather than a market segment; software can be delivered using this method to any market segment including home consumers, small business, medium and large business.

Support & Upgrades Hosted Online Infrastructure Integrated Tools & Data

Why SaaS? Market Demand All businesses are looking for new ways IT procured and delivered Get away from high dependence on IT dept Total cost of IT is four times the cost of License – Gartner 75% of IT Budget is spent maintaining existing IT infrastructure – Gartner Faster implementation High-end solutions for small teams Infrastructure Low cost high speed networks Market Success General : Salesforce.com, Netsuite, Webex, Google, Basecamp, Thinkfree Capital Markets : Salesforce.com, Monitor 110, Fundworks, Kyriba, Riskmetrics

Market Demand

All businesses are looking for new ways IT procured and delivered

Get away from high dependence on IT dept

Total cost of IT is four times the cost of License – Gartner

75% of IT Budget is spent maintaining existing IT infrastructure – Gartner

Faster implementation

High-end solutions for small teams

Infrastructure

Low cost high speed networks

Market Success

General : Salesforce.com, Netsuite, Webex, Google, Basecamp, Thinkfree

Capital Markets : Salesforce.com, Monitor 110, Fundworks, Kyriba, Riskmetrics

Barriers to SAAS take-up Function – ability to mass customise application Agility – ability of offerings to keep pace Trust – Perception re reliability, security, continuity Price – Belief that low price means low quality Self-delusion – “Most applications give us a competitive advantage” Corporate bureaucracy / Control freaks People want someone to “kick” if it goes wrong Availability of suitable solutions that can be integrated/mashed-up

Function – ability to mass customise application

Agility – ability of offerings to keep pace

Trust – Perception re reliability, security, continuity

Price – Belief that low price means low quality

Self-delusion – “Most applications give us a competitive advantage”

Corporate bureaucracy / Control freaks

People want someone to “kick” if it goes wrong

Availability of suitable solutions that can be integrated/mashed-up

What SAAS must provide Resilient / available Data accessible only to permitted users Encryption throughout Backups and real-time replication Mirrored facilities Accessible from anywhere, anytime High availability Configurable solutions that can rapidly adapt Easy to integrate Agile Secure

Data accessible only to permitted users

Encryption throughout

Backups and real-time replication

Mirrored facilities

Accessible from anywhere, anytime

High availability

Configurable solutions that can rapidly adapt

Easy to integrate

Q - When was Google last offline?

Q - When was Google last offline?

The contrast Integrated components Better support + upgrade ease Configured facilities Remotely accessed Less infrastructure Multi-tenant offerings Silo applications In-house devised data marts Single Site Installed apps Challenging integration IT hardware infrastructure 2008 2005

The Fund Manager of the Future Location of infrastructure will become an irrelevance to users Clients Fund Managers “ Markets” Policy News Modelling Rebalance Transactions CRM Funding Portfolio records Reporting News Research Market data Markets Performance

Buyside firms handling multi-asset class mandates in a profitable, controlled and robust manner using resilient and scalable technologies Recognise that few applications provide a buyside firm with lasting competitive edge Focus on core business of managing funds and outsource the rest Adoption of SAAS as a means to access best available solutions, offering integration, at affordable price

Recognise that few applications provide a buyside firm with lasting competitive edge

Focus on core business of managing funds and outsource the rest

Adoption of SAAS as a means to access best available solutions, offering integration, at affordable price