Technology continues to be ever more important in asset management, transforming the investment process at rapid speed, according to Joseph Scafidi, Director of Global Trading, Brandes Investment Partners.
“It can streamline processes, reduce risk and costs, and improve client experience,” he said.
This has already impacted the sell-side dramatically over the past decade, he added.
Scafidi added that many buy-side firms are also putting through larger and larger amounts of data through machine learning algorithms, natural language processing models, and other tools to extract insights and investment ideas.
Scafidi said that portfolio management solutions are expanding optimization capabilities and further integrating risk management platforms, therefore helping to minimize risk and seeking to maximize returns.
“On the trading front, we are seeing greater use of algorithm wheels and other venue access/routing tools to execute trades more quickly and efficiently,” he said.
This can enable the trader to focus on the orders they can truly add value to while minimizing transaction costs and improve investment performance, he added.
Scafidi also sees value and an increase in self-service software tools, such as those being used to generate reports: “In fact, we are actively working on a project for our clients in this area this quarter.”
BUY-SIDE CHALLENGES
Founded in 1974, Brandes Investment Partners is an investment advisory firm, managing equity and fixed-income assets for institutional and private clients worldwide.
As a value focused investment management firm, Brandes endeavors to block out the “noise and short-termism many participants in the industry often succumb to,” according to Scafidi.
“That said, we recognize the industry is evolving and more competitive than ever,” he added.
According to Scafidi, the asset management industry as a whole continues to face several challenges that can impact investment performance and asset growth.
Not surprisingly, some of the biggest challenges currently facing the industry include regulation, navigating geopolitical events, cyber security, digital transformation, financial pressures via rising costs and fee compression, and continued industry consolidation, he stressed.
“Particularly in the US, recession risk remains high on managers’ minds, with diverging signals about the pace of economic growth,” he said.
Actions by central banks and the Russia-Ukraine war, along with cyclical and structural tailwinds, are contributing to increased levels of market volatility that, while making it difficult to anticipate market movements, can also create incredibly good long-term buying opportunities, he said.
According to Scafidi, in early 2022, U.S. stocks were trading at higher price/cash flow multiples than at any of the previous cycle turns, while international stocks were trading at a more-than-30% discount relative to U.S. stocks and a more attractive overall valuation level.
Moreover, the industry continues to face increased levels of regulatory changes that can be challenging to implement in a timely manner.
“The resources and cost to implement even a small percentage of proposed changes can dramatically impact small and mid-sized firms in the industry,” he said.
“Take for example the recent approval to a T+1 settlement cycle change in the US: being out-of-compliance is simply not an option,” he said.
According to Scafidi, it will take fundamental changes – allocations and affirmation processes, clearinghouse timelines, and changes to securities lending to get it done.
Whether a regulatory piece is applicable primarily to sell-side, or both buy and sell-side, the cost inevitably makes its way to all participants in the ecosystem, he stressed.
For most of Scafidi’s career, technology has been a disruptive force, he said, adding that the Digital Transformation – progress in computing advances, the use of the cloud, and more recently AI – continues to rapidly “steer and reshape our industry, forcing us to regularly reassess our approach and skillset”.
He argued that at an ever-increasing pace, asset managers must consider these technologies and decide whether and how to embrace them to stay competitive.
As a result, the industry remains a prime target for cyberattacks, and must continue to take steps to protect against these threats, Scafidi said.
“This is one area where I would like to see more collaboration amongst various participants,” he stressed.
According to Scafidi, increases in regulation and investment in technology for advancement and security lead to rising costs. Combined with continued fee compression from competition and the desire for greater transparency, financial pressures on the industry are significant and likely to grow, he noted.
This has resulted in industry-wide consolidation as industry players seek to gain and leverage scale and benefit from synergies, he added.
“Size is now a critical factor for broad distribution reach, product breath, and cost efficiency,” Scafidi said.
“Going forward, traditional firms, especially those that are small- and mid-sized, must refine and re-focus on their value-add for relevancy and growth,” he added.
TRADERS’ ENGAGEMENT WITHIN BUY SIDE
After spending the first 21 years of his career on the sell side, Scafidi decided to make the move to the buy side nearly 16 years ago. During this time, he has witnessed the expansion of the skill set and capabilities for many buy-side desks. He said this is due to many factors including: increased collaboration amongst various buy-side firms in areas like market structure reform, and partnership and improved education and communication with the sell-side and hiring personnel from new talent pools.
Scafidi said that trading desks for traditional long only firms have a “wonderful opportunity for alpha retention, or reducing the frictional costs associated with implementing the decisions made by our investment teams”.
According to Scafidi, other opportunities include:
- Improve collaboration (always): Faced with higher levels of market volatility and liquidity “squeeze”, traders can work even more closely with the investment team and sell-side relationships to develop and implement better, more effective risk management and custom execution strategies.
- Be part of compliance (always): Traders should work to stay up to date on regulatory changes and help ensure the firm is following relevant rules and regulations – don’t wait for a call to do so. Be proactive in working with Legal and Compliance teams on the development and implementation of certain policies and stay informed on regulatory developments.
- Embracing technology (always): Traders must leverage technology to improve their trading strategies and gain a competitive edge. I constantly challenge my traders and team to explore new offerings and their fit to our needs. But that should not come at the expense of relationships.
According to Scafidi, traders are a closely-knit community, placing high value on personal relationships and despite a world of increased digital/virtual communication, interactions.
When asked about effective ways for traders to engage within the buy-side industry, Scafidi said that participation is key. In his opinion, industry events are still one of the most effective ways to network with other professionals, learn about the latest trends and developments in the industry, and raise their profile. “One must be open to speak on panels, share insights, and participate in discussions,” he said.
Scafidi also said that traders should write thought leadership articles. This can be sometimes limited by Compliance and Investment departments, but to the extent possible, traders should consider sharing their insights and expertise, he said. For example, he said, Brandes and 26 other buy-side firms joined to opine on the introduction of a discretionary limit order type for the IEX exchange in 2020.
He also believes that traders should participate in industry associations. Traders can join industry associations and participate in committees and working groups to collaborate with other professionals in the industry and help drive change where it’s needed, he said.
Scafidi has been a member of Trader Forum, National Organization of Investment Professionals (N.O.I.P) and ICI for most of his time on the buy-side as well as some informal groups, which work together to help problem solve and improve outcomes for the asset owners.
In addition, Scafidi said that traders should provide value-added services within your own firm.
Traders can differentiate themselves by providing value-added services to both the investment teams and client facing colleagues, he said.
“Think of customized market research, for example. Or collaborating with the portfolio and client management team to speak on a due diligence visit,” he said.
“This can help to build relationships and establish a reputation as a trusted and valuable partner in the investment process,” he concluded.
