P&L Report Card
Thanks to everyone’s obsession with MiFID II, the asset manager space is another where we have not seen a tremendous amount of movement in the past 12 months. Yes, there is a greater focus on execution quality and more managers have discovered the words “market” and “impact”, but overall what we are seeing is the continuation of a trend that started in 2016.
Executions desks are under as much pressure, if not more, than their service providers, which means they are searching for the tools and services that can help them deliver those vital extra basis points in performance. We will, of course, not miss this opportunity to once again bemoan the lack of understanding at the top level of the asset management industry where too many remain obsessed with tracking error – even though their continued use of the WM Fix means they are giving away performance points almost on a daily basis!
The greater focus on execution quality has come at the cost, in terms of time spent in the spotlight, to the vitally important posttrade processing aspect of the service, however there have been substantial improvements in this area which have allowed firms like Citi, Deutsche, JP Morgan and UBS to be spoken about in the same breath as Bank of New York Mellon and State Street.
Excellent processing then is a must have, but the deal clincher will be liquidity and execution quality – and given how the asset manager community is very much at the centre of the shift to push market risk back into clients’ hands, this means algos.
Again, given the conservative nature of the segment, algo adoption hasn’t been huge, but it is growing and for asset managers in particular we think it will grow further (once a few larger players adopt you can be sure the others will follow – they’ll be scared of tracking error!).
As more banks follow the pioneers that were BNP Paribas (and JP Morgan this year) in integrating their algo suites with third party channels, we suspect we will see more interest in the single dealer platform model from this customer segment. The richer functionality and analytics make it an easy sell internally, although we would once again stress how these customers want access to the internalised pools of liquidity.
As market impact becomes increasingly high profile, we would also expect asset managers to look more closely at who can give them the complete solution of analytics, execution flexibility, processing, and reporting – and this again could lead to a re-assessment of how they handle their FX risk.
There is clearly a trust issue remaining between banks and asset managers, but it is being repaired as more conversations are driven by data. If the banks do move towards including more data from their internal pools in their analytics, asset managers will naturally gyrate that way, meaning there is more chance they will use that institution’s algos. In this space at least, we believe the race is just starting and anyone can win.
An institution to most definitely watch here is Bank of New York Mellon, although as we noted previously it may not be a 2018 story. The bank has undoubted processing power when it comes to the workflow and now it is starting to focus properly on the execution piece.
We expect to see the rollout of pre-trade analytics, algo strategies and, possibly, options products over the next year or two and once it has these products packaged into a platform, BNYM will represent a very powerful proposition for any asset manager seeking a provider with the execution tools to match an excellent post-trade processing service.
State Street has also rolled out algo execution capabilities, it will be interesting to see how the bank’s excellent e-trading business develops its suite of products from here.
Finally, we will be interested to see how the revamped Marquee from Goldman Sachs goes down with the asset manager community. The firm is breaking down its internal siloes and trying very much to reflect the trend that has seen asset manager execution desks become multiasset class. The jury is still out on this model, but Goldman could very well be gaining an early edge if the market does indeed go that way.
Winner – Deutsche Bank
For now though, we believe that winner is Deutsche Bank, which has made a couple of very important enhancements to Autobahn to make it more attractive to this important client segment.
Deutsche as a flow house and risk warehouse has always kept the bank competitive with asset managers, however to this it has recently enhanced its Maestro product – formerly DB Overlay – and, as we have noted, rolled out new analytics and algos for use by clients.
Processing is vitally important to asset managers and Deutsche’s currency exposure hedging and systematic hedging processes really speak to this user group. Asset managers can hedge passively, via currency overlay, or dynamically, but either way the solution helps by providing signals from the analytics packages the bank has rolled out.
As we noted in the Product of the Year write up, clients can build their own signals, and execute in a multi-dealer environment, with one ISDA. Clients can also build a hedging policy that includes baskets of currencies, and all is backtested at share class and/or portfolio level.
The range of execution solutions available, the aforementioned multi-dealer mechanism, Deutsche’s risk price or its algos, or the WM Fix, all add to the vital flexibility required by an asset manager.
It is not all about the routine, of course, and here Deutsche has made an important move by rolling out more algo execution products as well as its enhanced suite of analytics.
Execution desks need the information at their fingertips to help them make smarter decisions and Deutsche now offers this on Autobahn.
By embracing the wide range of client types in the asset manager space, Deutsche has taken a large step forward in terms of how it services this vitally important client segment. Autobahn offers the asset manager everything in terms of execution tools and workflow efficiencies – backed up of course, by a still very healthy risk profile.