Many of the world’s largest sovereign wealth funds are pushing the envelope in pursuing innovative and sophisticated investment strategies. And just as many can be considered first movers in leveraging technology and data to streamline and enhance their operations. But the advances of those on the cutting edge is matched by the gaps that remain for others, whose middle-office infrastructure and data management capabilities remain inadequate for today’s investment landscape. Those who may have data and operations gaps, to be sure, are intent to catch up. But rather than just keeping pace, many are looking to leapfrog the rest of the asset owner universe as the competitive advantages of data and analytics become more apparent.
Beyond gravitating toward more sophisticated asset classes, many sovereign wealth funds are also pursuing direct investments in private equity, venture capital and other real assets, competing directly with fund managers in sourcing deals. The number of direct transactions by SWFs has increased by roughly 25% since 20151.
Accommodating the data requirements to invest in and manage illiquid securities is just one driver of sovereign wealth funds’ more holistic transformation initiatives. Many leading sovereign investors are also focused on how these capabilities – further enhanced through cloud computing and advances in machine learning technologies – can support their fledgling data science programs. And this is creating material advantages for those able to ingest, manipulate and model unstructured data to inform investment decisions across their more comprehensive holdings.
Still, across the larger sovereign universe, there’s been a bifurcation as to where funds reside on their data journeys. Many would certainly qualify as early adopters, but nearly as many have taken a conservative approach in building out their middle-office capabilities.
Some, for instance, haven’t had to invest in their middle-office. As government-run institutions, they may not face the regulatory requirements more common to traditional fund managers or the disclosure requirements that would otherwise incentivize organizations to develop competencies to streamline operations and cut costs. Cybersecurity fears have also, up to now, created reservations about migrating to the cloud. And related concerns around where data is domiciled can’t be overlooked.
This is not to say that the interest is not there. Many continue to build out their larger investment operations to pursue alpha-generating segments, characterized by more complex data needs. This isn’t immediately evident to the wider market, as a time lag typically exists between hiring the required investment staff to manage these allocations and putting the infrastructure in place to accommodate the new strategies. But perceptions and awareness around what’s possible through technology are indeed changing. And it’s against this backdrop that the sovereign wealth funds that haven’t yet embraced digital transformation are taking steps to do so.
Among the more conservative institutions, some have been slower to transition their technology and data management infrastructure to the cloud. This can make it more difficult to leverage capabilities enabled by cloud computing – namely machine learning and artificial intelligence.
Moreover, the cloud can offer on-demand, elastic infrastructure and resiliency through recovery-oriented, fault-tolerant computing. And as it relates to security, through facilitating AI, the cloud has become a gating item before institutions can implement some of the most promising solutions to protect against would-be risks. Not to be overlooked, best practices today also dictate that the cloud can better address disaster-recovery scenarios than traditional on-premise options.
From an operational perspective, too, the scalability afforded allows asset owners to seamlessly move into alternative assets, derivative instruments and other private securities. In the spirit of efficiency, and having one all-inclusive view of relevant data, it’s also important for sovereigns to access these investments on one platform. As a result, most sovereign wealth fund clients we speak to will say it’s not a question of “why” or “why not” to migrate to the cloud, but rather “when” and “how,” as operations teams consider private, public, and hybrid cloud options.
With the rise of the cloud, the focus on data quality is becoming more pronounced. Bad data, investment institutions well know, come at a great expense, often attributable to manual intervention to solve data issues, broken business processes, and misguided decisions due to poor or inaccurate data. Given the volume and velocity of data today, it is incumbent upon the data function to simplify these processes as much as possible.
As it relates to data management, generally, these trends have seen CIO appetites shift from customization to standardization to streamline information flows, ease upgrade requirements, and enable plug-and-play technologies. The goal is to improve data quality, but standardization also counteracts the threat of obsolescence.
Consider the evolution of how institutions manage golden copy securities master data. Twenty years ago, the most sophisticated middle-offices pushed for a single source of data that represented the official record of an investment organization. Over time -- as the industry has grown, as asset managers pursued global expansion, and as the pace of investment activity accelerated – different versions of the truth again multiplied. Beyond just portfolio management use cases, investment books of record (IBOR) have since been co-opted for risk reporting, collateral management, performance measurement, and other functions. The growing utilization of this data has also driven new demands for intra-day IBORs, “shadow” IBORs, and international IBORs (across various time zones).
It begs the question of whether a single version of the truth really exists given how global organizations utilize and report on their data today. In fact, rather than trying to achieve a single “universal” one, the latest data and analytics solutions now allow organizations to focus on how to change the specific environments in which data is used versus altering the solution itself for each discrete application. One of the benefits that actually favors those who have been slow to adopt the latest technology solutions is that those who are starting from scratch in building out their data infrastructure are actually in a better position to embrace this change in philosophy – free from obsolete legacy systems and hard-to-manage technology debt.
In the past, investments in data management were usually premised on streamlining operations to create new efficiencies and lower costs. Today, though, investment institutions of all stripes recognize a material competitive advantage for those able to manage and leverage their data more effectively. Emerging technologies, from AI to machine learning, create powerful new capabilities that allow asset owners to recognize and act on trends in the data that wouldn’t otherwise be evident. Data science and proficiency in managing big data also allow sovereign wealth funds to create a systematic and continuous approach to audits, through discerning emerging risks in real time and establishing independent automated controls.
The good news for those only now embarking on their digital journey is that those who came before them have effectively created a blueprint around digital transformation, an archetype that can be borrowed and built upon to create an effective and flexible foundation. The bad news, however, is that if asset owners wait any longer to embark on this journey, they’ll increasingly be at a disadvantage to those further along the curve, whose capabilities are only improving. And the difference between technology’s slower adopters and those on the cutting edge will become more pronounced as investment strategies gravitate toward ever more complexity and as new innovations widen the gap between those who can bring these capabilities to bear and those who can’t.
1 Source: Sovereign Wealth Fund Institute (SWFI).
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Head of BNY Mellon Data and Analytics Solutions in EMEA
As Head of EMEA for BNY Mellon Data and Analytics Solutions, Dan Cavanaugh is responsible for business development, professional services, and operational performance of all of BNY Mellon Data and Analytic Solutions’ business interests in Europe, Middle East, and Africa. With more than 25 years of client service and technology experience, Mr. Cavanaugh has a keen understanding of the growth, profitability and industry challenges facing financial institutions around the world today.View Profile