HSBC Global Asset Management is going through a global upgrade of its core fund-management systems, according to executives at the firm involved in the London-driven transition.
Along with the need to maintain a robust technology stack to support the $470 billion business, the move reflects a view that public equity markets have changed, and require a different approach.
The biggest factor is the influence of Big Tech stocks in the major indices, especially in the U.S. Although many industry executives blame ETFs for the rise of passive investing and the compression of fees, HSBC officials say the changing composition of blue-chip companies has also compounded difficulties in achieving alpha through conventional, bottom-up stock-picking.
“The share of portfolio, innovation, influence and consumer attention are all concentrated in Big Tech,” says this exec. “Twenty years ago we had far more diverse leadership in the economy, including banks and energy companies. It’s hard for both passive and active investors now: do you stick to following the market cap, or do you diversify?”
And although Big Tech names like Facebook, Apple, Amazon, Google and Netflix heavily influence leading U.S. equity indexes, it’s hard for fund managers to capture many relevant tech companies, which remain privately held.
“Unless you’re an early-stage private investor, it’s hard to capture this in public markets,” the exec said.
Although this is not the reason for the trend toward passive investment, including factor-based or smart-beta strategies, the power of Big Tech’s FAANGs and the lack of access to the rest of the industry have permanently changed the way fund managers can generate performance – and thus impacted the tech stack required to remain relevant.
“Old-fashioned active fund management isn’t staging a comeback,” the exec said. “So we have to be smarter, and use more tools and disciplines.”
The first priority is the order-management system (the electronic system for executing a portfolio manager’s trades) and how this feeds into the execution management system (software to get market data and track trades).
HSBC Global Asset Management has replaced a patchwork of OMS and EMS solutions with Bloomberg Professional Services, a single, global platform. Enough legacy systems had come to the end of their useful life, and the firm saw an opportunity to replace a patchwork with one OMS/EMS that both scales globally, and takes charge of the constant flow of regulatory and market updates. The integration began in Europe and is now wrapping up in Asia.
A global platform will give portfolio managers a clearer view of their positions, and ensure data is compatible across jurisdictions (including details such as timestamping orders). This should also make operations, including client reporting, more efficient.
“We’re pushing our fund managers to be more demanding of the apps and the software we use,” the exec said, and ensuring fund managers can manage and trade portfolios. But he also says the upgrade is not likely to be a competitive advantage against other big global players: “It’s hygiene: you have to have this just to show up.”
To find an edge, the firm is looking at artificial intelligence solutions. These are designed to support the team’s investment process and philosophy, which despite the changed market conditions, remains focused on active, human decisions; HSBC isn’t a quant shop.
It is experimenting with A.I. that screens unstructured data to search for nuggets of relevant information – a necessity as sources of information balloon to thousands of research websites, blogs, and other non-traditional places.
HSBC’s research team in London is therefore building its own A.I. to flag events that a portfolio manager might need to know, from quant factors to announcements. Sometimes managers may already be aware of these (a big corporate action, say) but the volume of information means there are also instances when the machine can alert the team early.
“This is core to what we do, so we don’t want to use an external vendor to build this,” the exec said. The firm already has core systems for investment decisions, which is part of its intellectual property and governance process. Moreover, too many vendors develop these signals for quantitative strategies, coming up with far too many indicators to be useful to a human manager.
The project is at an early stage.