The TEXPERS Blog

Traditional active asset managers aren't adjusting to new investment challenges

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Identification and collection of information used to be as important to the analysis of 

that information, according to columnist Ken McAtamney. 

By Ken McAtamney

Guest Columnist

As the shift from active to passive investing in the discretionary equity space has continued to accelerate, it has become evident that traditional active asset management firms—such as long-only, fundamentally driven stock-pickers—are facing a crisis of relevance.

One reason is that, collectively, traditional active asset managers have fallen short of investor expectations in failing to deliver risk-adjusted, net-of-fee performance. Maybe this is just a cyclical reversal, but perhaps there is a more enduring reason: that the world has changed while many traditional managers, proudly clinging to their artisanal approach, have not been able to adapt to the changing dynamics, and this lack of evolution has hampered risk/returns.

For decades, the identification and collection of information were almost as important as the analysis of that information. Recently, regulatory changes and technological advances have shifted the paradigm. Access to timely information is now ubiquitous and free—in a word, commoditized. This, in turn, has created new challenges, highlighting the human limitations of processing so much information in a conventional analog fashion.

I believe most traditional active managers have yet to adjust to this new reality and need to add more “science” to the “art” of investing to harness the new challenges. As in many other endeavors, technology will be crucial for the future of active management.

So, are fundamental active managers investing sufficiently in technology and in the right areas to preserve that future? While they are spending large sums on information technology, the spending has not adequately focused on alpha enhancement.

According to Gartner and Institutional Investor, the investment management industry spends two times the global industry average on information technology, which is about 8 to 9 percent of revenue (versus 3 to 4 percent for the global average).

Looking more closely, the majority (50 to 70 percent) of this IT spending has focuses on middle- and back-office operations, which we could qualify as defensive (or necessary) spending. Approximately 10 to 30 percent focused on client-related activities.

Only the balance (10 to 30 percent) is spent on the front end or actual investment process (and, of that, one-fourth is for market data, which is not really technology). This offensive spending has largely focused on risk-management systems (especially after the global financial crisis of 2007-2008) or other non-alpha-generating areas, such as compensation and benefits.

The most significant opportunity in investment-related spending is in technologies designed to enhance the existing investment process, slowly moving away from using technology to access data to incorporating more advanced analytics focused on investment decision-making and alpha-generation. No technology solution will fix a subpar investment process, but having the right systems to support the process is key.

Industry consultant Boston Consulting Group stated in a recent report on the outlook for the asset-management industry: “It will become increasingly clear that competence in advanced data and analytics will define competitive advantage in the industry in the not-too-distant future.” 

I believe the future of technology adoption in the investment arena lies on applying business intelligence, machine learning, and artificial intelligence to big data (both structured and unstructured) to visualize the investment process and potential outcomes in a way that most investment professionals cannot see as clearly today.

By allowing a faster and more efficient analysis of the information available and continual improvement of the decision-making process, existing and future technologies can improve human judgment.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of William Blair. 

Ken McAtamney

About the Author:

Ken McAtamney is a portfolio manager for the William Blair Global Leaders and International Leaders strategies. He joined William Blair in 2005 and previously served as co‐director of research, as well as mid‐large cap industrials and healthcare analyst. Before joining William Blair, Ken was a vice president for Goldman Sachs and Co. There, he was responsible for institutional equity research coverage for both international and domestic equity, and he was a corporate banking officer with NBD Bank.