This latest professionalization wave shares all the common attributes of increased trust, competency, and regulatory standards you’ll hear from industry bodies like the CFA (the latest Global Survey on the State of Investor Trust is a worthwhile read), but the real drivers for change can be found in day-to-day operations. It’s the changing pressures at the individual fund-level that has triggered the professionalization of buy-side research operations in the last 2 years.
The confluence of rising compliance obligations, demand for operational excellence and transparency, tightening fee pressures, cybersecurity concerns, technology modernization – all means you need to extract more accountability and more productivity from your investment operations than ever before. So, while professionalization may well be a mouthful, and possibly even a buzzword, for most fund managers today it’s a process well underway.
That a more consistent, professional approach to the investment research process can deliver competitive advantage is no longer up for debate, what remains in question is what’s your best route to get there.
Professionalization in Practice
Of course, you’re increasingly looking to uncover exactly what constitutes your most successful investment process. And yet in reaching for this, you’ll find that best practice has rarely, if ever, been documented. Few frameworks have been consistently implemented or shared either internally, or across the industry.
This is why the most common question we get asked day-in day-out is, “what is everyone else doing?”
As a research platform vendor, we’ve had a front-row seat to how the professionalization of research operations is playing out, and how firms are evaluating processes and leveraging technology in order to add structure to their operations.
One of the most notable changes that we’ve seen taking place is a shift in mindset. That demonstrating fiduciary duty and delivering performance are indeed two side of the same coin; that what’s good for the front-office can also be good for the back-office, and vice-versa.
With an understanding that both the offensive (front-office) and the defensive (back-office) objectives and technology decisions can benefit from each other, here’s a few of the commonalities of best practice we see happening today…
So, what is Everyone Else Doing?
It goes without saying that every fund is different in terms of its investment research process, technical resources and will to implement structure and process.
Most agree that a successful investment research operation is one in which your data, people and processes are working together. When that happens, you can track the entire investment lifecycle from inception to execution, bridge to active portfolio positions and drive insight to guide future decisions and determine new ways to differentiate the fund. [See our previous blog post on how to build a research process that delivers, here.]
The degree to which you choose or need to professionalize elements of your research operations will depend on a number of factors, including your strategy, size, style and starting point. However, typically we can break down the common goals and approaches into three main buckets. Essentially, it boils down to how you manage your Knowledge, Process and Data.
Knowledge Management – The Offense and Defense
When most funds begin to assess their research function, they typically look toward a single data repository to store and access fund-wide information. Essentially, they want to organize their research assets. And while that is an excellent place to start, most realize that there’s far more to effective knowledge management than just storing and indexing information.
Let’s take primary research – and a centralized system of record – as the example and how firms can leverage technology both in offense and defensive capacity.
First, the offense: a centralized organizational system ensures research data is discoverable, meaningful and actionable across the fund. One key benefit within this is how it enables you to institutionalize your firm’s knowledge. Analyst’s across teams can see and find content and context across the firm and leverage as appropriate, and there’s huge benefit to retaining that knowledge if and when individuals move on.
And for compliance? It’s all about attribution. With a consolidated research system, and your structure embedded in, they can more easily stay on top of activity in the front-office while being minimally invasive, more easily track where money is being spent – whether it be with sell-side corporate access or expert network calls, and can quickly execute on discovery requests, say, rather than wading through multiple systems and still being uncertain if you’ve missed any gaps.
Process Management – A Little Structure Goes a Long Way
Once you have successfully removed data silos and implemented a well-structured and accessible system of record for your research data, the next step is to arm your front-office with the tools to work smarter and more efficiently and consistently for the fund.
Take your investment research or new idea pipelines; adding structure in how you input, track and progress investment ideas and diligence checks. Increasing the consistency and repeatability in research practices and documentation here (think standardized templates, scoring fields, sharing models, timeline rules) will optimize individual productivity for idea generation and speed-up informed comparison and prioritization of decisions.
Here, analysts always know “what’s next” for each idea and PM’s get a window into the effectiveness of each stage to uncover latent opportunities and identify efficiencies.
As well as boosting productivity, this approach to institutionalizing process also equips portfolio managers with a new pattern recognition capability that learns from previous investment positions and accelerates the efficiency and success of future ones. Importantly, rather than following a rigid, proceduralized approach, the effect is in fact to protect the autonomy of individual analysts, and minimize the need for PM oversight or compliance intervention in workflows.
Data Management – Normalization
With content silos broken down and centralized [knowledge management], institutionalized process in place [process management], you’ve added structure to normalize your research data for analysis, integration and more. Often considered the holy grail in investment research operations, when you fully synchronize your structured research with portfolio systems, external data sources and compliance systems – your system of record takes on a whole other dimension. Data normalization is critical to this.
Of course data capture and aggregation of your standardized process, as referenced above in your pipeline, helps individual analysts and teams achieve measurable improvements in output and results, but it also enables you to extract broader insights and start to consider value to other systems
For example, giving your investment team the ability to easily capture inputs i.e. standardized fields for company-level metrics and attributes related to investments, allows for more consistent analysis of ideas. For analysts, time-series charts of price target assumptions can sit alongside team-specific dashboards, enabling broader insights across the team, and so on.
On the flip side, for compliance and ops, by managing and normalizing that data across a central repository you can more readily manage critical data access and cybersecurity. You can start to consider how piping that data into other systems could benefit the firm, you can use the structure to analyze the value of third party vendors, report on research consumption, or you can use the standardize data to analyze the risk profile of the positions in your book. The world is really your oyster.
Finding Your Balance
Again, we know every fund is different. The key is finding a system of record that delivers you a framework that enables the right balance of flexibility with formality, of empowering analysts and enabling compliance, and that the structure you implement is industry best-practice, but entirely your own.
You’re looking for consistency in your own research operations not uniformity with everyone else’s.
For those that have already made the leap, the change of mindset is apparent; analysts and investment professionals embrace more structure; with the right tools and approach adding consistency and process to the day-to-day does not need to be cumbersome but can in fact speed-up decision-making. For compliance and operations professionals, that means understanding the need for some flexibility over formality when it comes to that structure.
However you want to professionalize, it’s proven than enhanced collaboration, oversight and pattern recognition in your research process all points to an upswing in performance. And when you approach it with considered structure across your entire process, your investment research process can be made tangible for the first time, improving oversight and enabling performance to be continuously monitored, analyzed and enhanced.
If you’d like to learn more about how Bipsync can help deliver these benefits at your firm, get in touch.
A version of this article, by Bipsync CEO Danny Donado, first appeared in a recent HFM Week Special Report.