Data and analytics is no longer a new arrow in a company’s digital quiver—but how can strengthening technologies in D&A help asset managers in particular? Often, big data sets are too cumbersome to look through using standard queries: if the nature of the data is unknown, it’s difficult to apply any mathematical technique to extract its value. This brings us to the science of D&A, which is extremely important in this age of big data. D&A can be done on big data sets to successfully extract hidden value, informing decision-makers and helping drive business models.
An asset to asset managers
Fund management companies, like everyone, have loads of data. In order to extract the maximum value from this data, they must also have honed solutions for visualising and understanding:
- trends in their funds’ (clients’) subscriptions and redemptions
- the impact of flows on fund performance
- the impact of subscriptions and redemptions on liquidity, and hence on the returns of the portfolio
- how their fees compare to those charged for similar products on the market, and whether the fees are “market accepted” (i.e. by seeing what kind of fee structures are rewarded and accepted by investors for a given return-per-unit risk)
- how investor sentiment regarding new flows breaks down by asset class across different economic conditions in reaction to big news events
- whether investors follow funds that are going to generate good or positive returns in future, or if the flows are the reason for the higher returns
Fund management companies constantly need to develop new and better products for their clients—this has become the status quo in a hypercompetitive sector. The focus of my team and me is to help these companies provide tools to their clients that are built around the ideas listed above. As a result, I’ve been able to compile some observations about how asset managers can use such qualitative feedback. Read on for some area-specific insights.
Subscriptions and redemptions
The goal ought to be to understand the general trend shown by investors subscribing to or redeeming a fund. Knowing triggering events, seasonality, and other decision-making criteria by investors can be tremendously helpful in analysing the impact on the future flows to the fund.
Impact of flows on the performance of the fund
Significant inflows or outflows can cause funds to underperform in cases where the investment strategy is not flexible enough to accommodate such shocks. Huge outflows can sometimes result in an untimely liquidation of the portfolio, which can significantly affect performance. Therefore, obtaining an understanding of large flows’ potential impact on fund performance is of utmost importance.
Impact of subscription and redemptions on liquidity
Huge inflows or outflows can significantly affect liquidity: they can even temporarily derail the investment strategy. This would naturally have a negative effect on the risk return profile of the fund, possibly a significant one. Having a predictive understanding of flows can help fund managers prepare themselves for such turbulence.
Comparative study of the fees
Unsurprisingly, investors tend to fret over the fees they’re charged for investing in a fund. In fact, in my experience this is usually the key decision-making criterion, and so if the fees are too high compared to market standards, then investors may be reluctant to invest. Using data and analytics it’s possible to sample a large data set of fund fees and relate it to the flows, generating a unique view of fees versus the flows of a fund. This can be further used to determine the market-accepted fee rate for a given return-to-risk profile.
To conclude, I see huge potential going forward with integrating D&A in solution development for asset managers. The ideas that I have listed above are just the tip of the iceberg, as financial service providers like myself explore these unchartered territories. With the inclusion of new techniques like machine learning and pattern recognition, I believe investment decision-making as well as asset management services can be taken into a new spectrum of ease and functionality.
Next up on the KPMG Blog: