Investment Strategy

Investment Strategy software supports the highest level of the investment decision making process using proprietary investment decision support software. The most sophisticated of this software is provided by vendors with strong investment consulting service operations supported by large databases of market data. Although the capability to set target weights for portfolios is present in many Portfolio Management software packages Investment Strategy software provides the additional functionality to determine these weights. Many investment management firms have their own strategy methodology and develop in-house the Investment Strategy application. The choice of Investment Strategy software will be made almost entirely on business functionality by business users.

Investment Strategy software may be offered for all asset types or specialised by instrument / portfolio – equity, fixed interest, multi-asset and international - and by type of investment institution – such as plan sponsor or fund manager.

The following paragraph lists functions present in Investment Strategy software. Each of these functions represents complex investment management application methodologies :-

Software / Service Functions and Considerations

• Asset Allocation strategies – such as top-down asset, market, industry allocation, asset / liability modelling and style allocation.
• Investment analytic techniques to value aggregate investments such as markets, sectors or asset categories and individual security valuation or selection methods.
• Risk assessment – covering VaR, beta and duration / convexity methodologies.
• Quantitative modelling capabilities of optimisation, simulation, regression, scenario testing and what-ifs.
• Decision support - classifying data measures over market, asset, industry in hierarchical form and enabling interactive analysis.

Software is often integrated with the source data from the vendor’s own database in the form of current, forecast and historic time series data of market, asset, industry and economic measures. Data measures provided include classification weightings, returns and risk.

Research

The Research process makes use of software and services presenting market data, analysing risk , valuing assets, modelling and providing decision support. These capabilities may be achieved by in-house development, the customising of external specialised Research software products or the use of generic decision support software.

A fund management firm may choose to develop particular requirements in-house to support the firm’s proprietary investment process. Quantitative investment analytic techniques are likely to be developed in-house using general-purpose software.

The Research requirement for external information is met by vendors supplying data together with software products to present, manage and manipulate the data. This information may be customised to the firm’s needs.

In addition to this requirement for data Research has the most intensive appetite for information in the firm and uses a broad variety of general-purpose software – decision support, quantitative modelling, database, spreadsheet, word processing and Web / desk-top publishing.

Research software may be offered both in all-purpose form or specialised by instrument / portfolio – equity, fixed interest, multi-asset and international.

The following functions may be present in software supporting the Research function :-

Software / Service Functions and Considerations

• External data provision and integration into the firm’s Research and investment decision process for security, company, sector, markets data for such items as current, forecast, historical values, reports and news items from multiple sources.
• Securities selection and production of recommended security lists for portfolio management.
• Investment analytic methodologies for valuing and recommending securities and security aggregates in terms of return and risk.
• Quantitative modelling capabilities of optimisation, simulation, regression, scenario testing and what-ifs.
• Decision support - classifying data measures over market, asset, industry in hierarchical form and enabling interactive analysis

Portfolio Modelling

As with the Investment Management and Research functions software for Portfolio Modelling is classified as decision support software. However there is more opportunity for the use of standardised components in the Portfolio Modelling process than in Research and Investment Strategy. The Portfolio Modelling process which generates trades is closely linked to the firm’s operational trading needs. Because of this close link to the trade process Portfolio Modelling software is often incorporated in Order Management Systems (OMS) software. In addition many Portfolio Management System (PMS) software packages have the capability to model portfolios against target weights but these tend to lack the richer functionality present in OMS or specialist Portfolio Modelling software.

The following functions may be present in Portfolio Modelling software. These consist of the core portfolio re-balancing function supplemented by access to other components such as market data, investment analytics, querying and presentation capabilities :-

Software / Service Functions and Considerations

• Portfolio Modelling and re-balancing portfolio(s) structure to create intended security holdings with the transactions necessary to achieve these positions.
  • portfolio re-balancing – to meet strategic or tactical asset allocation changes and incorporate changes from new contributions or withdrawals into the portfolio by generating buys and sells.
  • decision support functions within Portfolio Modelling provide aggregation and classification within a portfolio or portfolio groups, drill-down to security or transaction level, listing of security holders and what-ifs. Model support functions include the capability of creating multiple models, saving models and user preference format defaults.
  • multiple instrument and portfolios coverage enabling equity, fixed interest, money market, derivatives, multi-asset, overlay and fund-of-fund portfolios to be handled. Mutual fund securities may have security look-through capabilities.
• Market data and price refresh capabilities of from real-time, delayed, snapshot price feeds and real-time security and cash positions
• Compliance checking in real-time selected by the user in addition to Pre-Order Compliance and Guideline checks.
• Query capabilities to access portfolio and security information including market, performance and holdings information.
• Presentation capabilities : GUI windows support, customised item selection for display, charting.

Pre-Order Compliance

Software supporting Pre-Order Compliance also supports Pre-Deal Compliance and Post Trade Compliance. While Pre-Order and Pre-Trade Compliance are required on an on-line basis Post-Trade Compliance may be implemented on a batch basis. Compliance checking software is offered by Order Management System (OMS) vendors as integral modules or in some cases as separate packages. The requirements for Compliance software concern administrative functions rather than firm-specific investment decision-making. Consequently Compliance functions are more standardised between packages.

The functions which may be included in Compliance software are :-

Software / Service Functions and Considerations

• Compliance rules to meet client mandates, regulatory requirements and internal house rules.
  • industry standard compliance checks are available as a suite of rules.
  • regulatory rules may be packaged within the Compliance software. Regulatory reporting diary dates may be maintained.
  • personal trading may be monitored and controlled.
  • security blacklists or include lists may be maintained. Ethical lists may be sourced from vendors.
  • on-line compliance checking may be initiated by the user at any point.
• Rules maintenance capability to define or change rules and to apply rules to a wide range of circumstances.
  • maintenance of rules by the user over all or only selected attributes.
  • application of rules at different hierarchic levels - at transaction, security or different portfolio classification levels.
  • documented or self-descriptive rules in the database for easy comprehension.
  • GUI functionality to facilitate rule entry. li>audit trails are maintained over changes to rules.
• Exception reporting : Compliance breaches are signalled by on-line alerts, reports, severity levels which define the user authorisation procedure to override the breach.

Deal Generation

Software for Deal (order, trade) Generation constructs the buy / sell deals for the dealer (trader) which the portfolio manager initiates through securities selection and portfolio modelling. Deal Generation Software enriches trades with information of brokers, blocking, allocations and priorities from the Order Management System (OMS) database before routing to the dealing function. Deal Generation is an integral component of OMS. A significant benefit of the software arises from its close integration with other order and deal activities. This integration is generally implemented in OMS as a central order database on which deals are stored for access by portfolio managers or dealers.

A further benefit of OMS and Deal Generation software for a firm derives from the standardised processing that is enabled for the firm. This benefit is enhanced by accommodating the different processing and formats required for different instrument types - such as equities, fixed interest, money market, FX and derivatives – within this standard process.

The following paragraph lists functions which may be present in Deal Generation software :-

Software / Service Functions and Considerations

• Deal Generation of trades from the portfolio manager’s security selection and portfolio modelling process necessary to achieve the desired portfolio structure and returns.
  • deal capture of buy / sell deals from portfolio manager and modelling process routed to dealers automatically but with the option of manual entry. This is done in real-time or batch.
  • FX deal generation from an underlying security transaction where funding is required.
  • deal strategy enables structuring of an order for broker placement into such deal types as :-
    • block deal : Blocking similar orders for the same security across portfolios
    • planned allocation : Allocating a security to a client by using own or industry rules.
    • program trade : A deal of a large number of securities to a particular broker,
  • deal structuring specifying constraints for the deal
    • limits and expiry dates for the deal
    • prioritisation of deals
    • brokers assignation to deals
    • manager comments and markers attached to a deal.
  • Routing of order from portfolio manager to named dealer or dealing desk
  • Compliance and validation of deal with warning of potential duplication or conflict between deals.
  • Amendment capability enables a previous deal to be changed. Particular functions are :-
    • cancelled deals are still stored in the OMS
    • audit report displays history of deals
  • Different instrument types of equities, bonds, money market, options and futures require different format deals and procedures.
  • On-line position keeping and updating for cash, security holdings and deals

Pre-Deal Compliance

Pre-Deal Compliance software performs compliance checks on the broker counterparties in addition to other compliance checking. Software supporting Pre-Deal Compliance also supports Pre-Order Compliance and Post-Trade Compliance. While Pre-Order and Pre-Deal Compliance are required on an on-line basis Post-Trade Compliance may be implemented on a batch basis. Compliance checking software is offered by Order Management System (OMS) vendors as integral modules or in other cases as separate packages. The requirements for Compliance software concern administrative functions rather than firm-specific investment decision-making. Consequently Compliance functions are more standardised between packages.

The following functions may be present in Compliance software :-

Software / Service Functions and Considerations

• Compliance rules to meet client mandates, regulatory requirements and internal house rules.
  • industry standard compliance checks are availabl e as a suite of rules.
  • regulatory rules may be packaged within the Compliance software. Regulatory reporting diary dates may be maintained.
  • personal trading may be monitored and controlled.
  • security blacklists or include lists may be maintained. Ethical lists may be sourced from vendors.
  • on-line compliance checking may be initiated by the user at any point.
• Rules maintenance capability to define or change rules and to apply rules to a wide range of circumstances.
  • maintenance of rules by the user over all or only selected attributes.
  • application of rules at different hierarchic levels - at transaction, security or different portfolio classification levels.
  • documented or self-descriptive rules in the database for easy comprehension.
  • GUI functionality to facilitate rule entry.
  • audit trails are maintained over changes to rules.
• On-line pricing availability together with security holding positions.
• Exception reporting : Compliance breaches are shown by on-line alerts, reports, severity levels which define the user authorisation procedure to override the breach.

Dealing

Software and technology are essential for the automated dealing connectivity that is required by many fund management firms. Dealers require external communication with brokers to place / execute deals and with market data sources for analytics or liquidity information. Internal links with Order Management Systems (OMS), Portfolio Management (PMS), and Investment Accounting (IAS) systems both to receive and record deals are also required. Control and management of deals and broker relationships are necessary for an effective operation. Information Technology and Dealing Systems support these basic requirements by providing communications, compliance checking, deal processing, position keeping and management of the whole Dealing operation.

The following paragraph lists functions which may be present in Dealing software :-

Software / Service Functions and Considerations

• Deal processing to construct fund management information for the deal.
  • type of deal affected by choices such as such as limit, day, expiry date, stop, fill policy.
  • deal strategy such as allocation, bulk, directed broker.
  • deal operation : bulking, splitting, combining, placing, amending, cancelling, substitute. securities, manual override, partial fill, execution with multiple brokers, round and odd lots
  • cross-relationships between deals, underlying positions, underlying securities.
  • instrument requirements for equities, fixed interest, money market, FX, options, futures.
  • deal tickets : electronic or paper.
• Electronic blotters support the Deal process recording the details of the status of orders from deal capture and placement with brokers to execution for access by dealers and portfolio managers.
  • record status of deal : pending, executed, partial fill.
  • position-keeping for securities and cash, monitor cash availability, refresh from investment accounting system.
  • customisation of blotters to dealer / instrument / currency requirements, multiple blotters per dealer and multiple dealer per blotter.
  • decision support capabilities of queries, views, filters, aggregation, drill-down, sorting.
• Compliance controls are necessary as Dealing is the final stage before deal execution with broker.
• Integration with IAS is necessary because IAS and OMS systems may be on separate databases.
  • end-of-day or real time links for maintaining positions and transactions.
• Reference files of broker commissions, country taxes, exchange fees.
• Dealer Organisation : Dealer groups, hierarchy, desk allocation.
• Broker Information for both dealing and management of relationship.
  • commission and soft dollar budgeting.
• Market Data provides the indicative price and analytics to evaluate the deal.
  • on-line market prices, volume weighted prices, ratios, news.
  • investment analytics functions to evaluate security prices (yield curves, duration, ...).
• Electronic networks and use of financial protocols such as FIX for electronic information transmission.
  • placement of deals with broker(s).
  • receive liquidity information of Indications of Interest.
  • access crossing networks
• Trade Impact Analysis services to analyse and recommend more efficient dealing strategies

Confirmation and Matching

The automation of the Confirmation and Matching process is necessary for Straight Through Processing to be achieved. Communication with counterparties is required to verify the executed deal and to prepare the instructions for settlement with the custodian. Use of electronic networks, databases and matching software significantly reduce both the elapsed time and failure rate of executed deals.

Industry-wide networks and message communication standards provide links from the firm to multiple brokers. The particular network service chosen varies by type of instrument, the capabilities of the service and compatibility with the firm’s own Portfolio Management (PMS), Investment Accounting (IAS), Order Management (OMS) systems or Matching / Settlement software.

A middleware implementation may facilitate integration of data between electronic order routing, confirmation and settlement networks and between the PMS, IAS, OMS and Matching systems.

The specific capabilities required for automation of the Confirmation and Matching process are:-

Software / Service Functions and Considerations

• Confirmation software allows Investment Manager and Broker to verify the details of the executed trade.
  • trade allocation rules
  • confirmation, affirmation processing and communication.
  • amended deals : amendments, cancelled deals.
  • settlement instruction database.
  • messaging : SWIFT, FIX, proprietary.
  • overdue reporting.
  • electronic network service provider
  • broker / custodian population available.
  • code cross-referencing capabilities for securities and brokers.
• Matching software enables checking of broker confirmation of allocation, values and instructions.
  • allocation and block level matching capabilities.
  • maintenance of matching rules such as for keys, values, tolerance levels.
• Confirmation and Matching Support and common functions.
  • instrument type of services – equity, fixed interest, money market, FX, derivatives.
  • compatibility with PMS, IAS, Settlement system, electronic networks.
  • audit trail, queries and reporting
  • exception processing, fails, reporting, automated trade repairs.
  •  access – polling, real–time or batch processing.
  • automated or manual operation, overrides, unattended operation.
  • user interface : security, GUI functionality.
• Middleware usage to enable inter-system connectivity.
  • message formats supported : SWIFT, FIX and fund manager firm’s preferred standard.
  • proprietary networks supported.
  • technical capabilities : rules, formatting, performance.

Trade Instruction

The automation of the Trade Instruction process speeds custodian notification and helps reduce the occurrence of failed settlements. The software components necessary to achieve this automation are : communications links / message definitions to custodians, a settlement instructions database and facilitatory interfaces to the firm’s internal / external systems. Middleware can provide the re-formatting and network access capabilities for integrating the firm’s internal Order Management Systems (OMS), Portfolio Management Systems (PMS), Investment Accounting Systems (IAS) to external systems.

Different instrument types such as international equities, fixed interest, money market, FX and derivatives have different message conventions that are provided by different industry bodies. The particular software technology solution adopted by a fund management firm depends on the firm’s own systems, the instruments traded and its links to custodians.

The functions that may be present in software for the Trade Instruction process are:-

Software / Service Functions and Considerations

• Trade Instruction software enables the electronic delivery of settlement instructions to the global custodian. This may be accomplished by the use of the global custodian’s proprietary network or via a vendor network such as SWIFT.
  • instrument type handled by software or service – equity, fixed interest, money market, FX, derivatives.
  • settlement instruction database availability, maintenance requirements to support database.
  • messaging types supported : SWIFT / ISITC, proprietary custodian messages.
  • compatibility of service or software with interface to firm’s IAS, PMS and confirmation / allocation messaging systems.
  • code cross-referencing capabilities for security codes and broker codes.
  • re-submission of trade instructions
  • reporting
• Middleware usage to enable inter-system connectivity
  • message formats supported : SWIFT and fund manager firm’s preferred standard
  • proprietary service networks supported
  • technical capabilities : rules, formatting, performance

Settlement

Settlement is the responsibility of the global custodians. There are various financial payments networks over which details of trade settlements instructions may be sent. Incoming SWIFT or other proprietary messages from the global custodian to the fund management firm indicate when settlement has taken place.

Middleware provides the reformatting capabilities which enable these messages to update the Investment Accounting System (IAS), Portfolio Management System (PMS) or specific Reconciliation packages.

The specific capabilities required for automation of the Settlement process are :-

Software / Service Functions and Considerations

• Settlement links to the global custodian are in the form of incoming and outgoing messages in SWIFT / ISITC or the custodian’s proprietary formats.
  • instrument type of service – equity, fixed interest, money market, FX, derivatives
  • interface to firm’s IAS, PMS, Reconciliation service
  • messaging : SWIFT, proprietary
  • access – polling, real-time or batch processing.
  • reporting
• Middleware usage to enable inter-system connectivity
  • message formats supported : SWIFT or fund manager firm’s preferred standard
  • proprietary service networks supported
  • technical capabilities : rules, formatting, performance

Settlement Reconciliation

Settlement Reconciliation software enables the fund management firm’s accounting records to be matched with those of the global custodian. Reconciliation may be for securities, cash positions or for transactions. Reconciliation procedures differ between different instrument types – international equities, fixed interest, money market, FX and derivatives. The frequency of reconciliation is set by the user – real-time, daily, weekly or monthly.

Reconciliation software integrates with Portfolio Management Systems (PMS) and Investment Accounting Systems (IAS) by custom interfaces, file transfers or through the use of middleware. Other confirmation, matching and settlement software may be available as a product suite of the software vendor. The reconciliation capabilities offered are similar to those offered in matching software.

Middleware provides the reformatting capabilities which enable information to be interfaced between internal and external applications.

The specific capabilities required for automation of the Settlement Reconciliation process are :-

Software / Service Functions and Considerations

• Reconciliation using intelligent matching on keys, descriptive and value attributes.
  • instrument types – equities, fixed interest, money market, derivatives
  • tolerance and attribute definitions
  • maintenance of matching rules
  • interface to firm’s IAS, PMS systems to upload custodian data
  • access in batch or real-time.
  • exceptions – reports, corrections
  • archive / restore data
  • audit trail of Reconciliation data and corrections.
  • reporting matched and unmatched transactions / holdings
• Middleware to enable inter-system connectivity using rules, re-formatting and message routing
  • message formats supported : SWIFT / ISITC or fund manager firm’s preferred standard
  • proprietary service networks supported
  • technical capabilities : rules, formatting, performance