I was going to start this blog entry with a clever story to link the importance of deploying enterprise services on an open platform (i.e. the computing infrastructure-CPU, database, network) but I’m really not much of a creative writer. So, instead I’ll just make some relevant points and hope to keep your attention. The three areas where I believe having an open approach to investment portfolio analytics has the most impact are security master, benchmarks and classifications. These three components are the bread and butter to having a robust and best in class investment analytics tool. A security master (i.e. the identification and valuation of assets) is the foundation of any system and its quality reflects the types analysis that can be computed. The benchmarks are required for relative analysis and classifications are the tags which help to categorize all of the assets in a fund.

In this blog, I’ll refer to funds, accounts and portfolios. These are all interchangeable and represent a basket of securities. Also, this discussion on open systems is really specific to investment and asset management systems and I will refer back to the StatPro Revolution service. I consider StatPro Revolution to be a best of breed “open system”. Of course, the best known current debate on open systems is the iOS (Apple) vs. Android (Google) operating systems. As hundreds of millions of us are impacted by this debate, iOS vs. Android helps define the stakes in open versus closed systems.

Here at StatPro, while we appreciate the design and quality of Apple (in fact most of our execs use iMacs, iPads and iPhones), my belief is that we really want our services to be more like the Android operating system which is more flexible and open.

Securities:  The importance of being able to price all of the security types that an asset management firm takes positions in cannot be underestimated. The reasons for this includes:

• Performance measurement: how can a firm truly measure their fund’s performance if their systems are not able to accept or recognized all of the security types that a firms buys, sells and holds. An open system will allow for custom securities to be created, for securities to be identified via an alias (think CFDs which are securities derived from an equity position but don’t require the owner of the CFD to own the underlying asset) and to be recognized by multiple identifiers such as their ISIN, CUSIP or SEDOL.
• Complex Assets: while the popular press is enamored with the equity markets, it is no secret that the fixed income and derivative market hold many, many times the value for the global economy. At one of the big Canadian bank’s trading floor, which is huge, the number of fixed income traders, dwarfs the number of equity traders. This is because the fixed income market is so much bigger and is not as easily automated. Therefore, a performance system must be able to allow the user to enter in the terms and conditions pertaining to the security. The majority of these complex assets are really traded between counterparties and typically are not listed on an exchange. Therefore, an open system is key since it will allow the firm to ensure that the OTC security they trade is properly modeled and thus priced. Think about a simple equity option. In order to price it properly, you need to know the option type, the currency, trade date, maturity date, exercise type, strike price and parity (i.e. how many options per contract). This last point is important since the United States Securities Exchange Commission aka the SEC is now allowing for options to be traded in lots of less than 100:1. This innovation in options aka mini-options are at valued on a ratio 10:1, which means buying/selling a call or a put for an expensive stock won’t cost as much. The idea here that it will allow retail investors to be more active in buying/selling options (obviously a sell side initiative). If you own a system that is open, this regulatory change will have zero impact on your shop. But the converse is that a shop running a closed system will have to undertake a massive project to modify their existing option process capabilities to handle this new market feature.
• Source: the asset management industry is not one to make hasty decisions in terms of where they source their pricing from. If a fund manager has always used a particular pricing source, then the performance measurement system needs to accommodate this source. At StatPro, while we are very proud of our ability to price fixed income instruments, we know that some portfolio managers won’t switch to our service if we don’t have their preferred price source as an option. So, as StatPro Revolution is a very open tool, we tied up a partnership with Interactive Data to provide their fixed income pricing as an option for our clients.  #winning @statprogroup

Classifications:  There are many ways to talk about security classifications. When I am doing demos of StatPro Revolution, I’ll refer to them as buckets (as in what bucket will your gold miner stocks fall into materials or metals), as filters (as in how are you going to filter your analysis by sector, currency or country) or as “slicing and dicing” (as in how are you going to dig into your analysis i.e. I want to decompose my global fixed income portfolio into country and then maturity bands)  Eds.note: I don’t use the slicing and dicing analogy during pre-lunch demo’s as prospects start thinking about food and tend to not follow my stellar explanation of the statistics used in calculating VaR(!)

• Choice: a great performance system will give users a choice between using the systems classification schemes, deriving a classification from the system one or creating a custom classification. In the asset management industry, securing a pension plan as an investor is very important for any asset manager since the pension funds typically will place very large mandates. These very large funds really dictate to the fund how they want to see their performance statements. This makes sense as if you are giving a fund $500 million, asking for the attribution analysis to be shown in the way your pension plan wants should not cause any protest by the asset manager. And, as each fund has a different way of looking at assets, a fund manager will need a system that can easily be modified to meet their investor’s standards. So, don’t underestimate the importance of a flexible approach to classifications.

Benchmarks (aka indexes): The reality of the asset management business is that no fund is looked at in isolation. This is why we see company’s like S&P, MSCI and others make fortunes from their index publishing businesses. All funds get compared to something, it’s just a fact. Therefore, it simply makes no sense for firms to use tools that are inflexible in providing benchmark data.

• Choice: At StatPro, we believe that providing our customers with a large number of indexes from multiple publishers is a key component of our success. As we offer a service, there is a huge advantage to tell our clients that we only need their holdings data and that with the right permissions we can offer them their index of choice. The amount of headaches we relieve for our clients is huge. Not only do we handle all of the transport, checking and loading of these indexes but we include this in our fee.
• Customization: an open system will facilitate the ability to create a custom benchmark. This can take many forms either as a derived benchmark, the ability to compare the fund against another fund or to compare it against a model. As the asset management firms continue to innovate and to launch new investment strategies, an open system will make it easy to create and analyze fund performance against all sorts of benchmarks.
• Change of index: a service which contains multiple indexes provides the portfolio manager an option to quickly see how they perform against a different index. This is important for global funds or funds that are managed in one country but owned in a different one. StatPro Revolution has a great feature in which we allow clients to create a “target allocation benchmark” aka a blended benchmark, our slick wizard tool makes it easy to assign a weight to different indexes so that in the case of a global fund you can run your US assets against a US benchmark, your Japanese assets versus a Japanese index…etc.

In conclusion, there are many reasons for enterprise software and services to be open. In the asset management space, it is just so important for tools to be flexible. A closed system immediately will immediately cause pain and suffering since by nature it simply won’t keep up with the changes that are ever present in our industry. Just think about the regulatory changes, the investment strategy changes, market volatility and most importantly demanding investors, it is enough to make your head spin.