The most powerful computer programs to assist investment decisions are overwhelmingly in the hands of only the largest U.S. institutional money managers.
The cost of these investment decision support systems - as much as $30,000 to $50,000 each per month - is creating a have- and have-not world for money managers, at a time when the programs are increasingly important for managing assets in an increasingly complex global investment arena.
And, whether some money managers are equipped with such tools is important to pension fund executives.
An estimated 95% of the nation's 100 largest money managers - those with $10 billion or more under management - use decision support tools such as valuation models or risk analytics. About 75% of the 350 of the largest money managers - those with $500 million or more under management - use them, estimates Harish Lakhani, product development manager for BARRA Inc., Berkeley, Calif.
By contrast, no more than 25% of those managers with less than $500 million under management use those tools, Mr. Lakhani estimated. BARRA is a worldwide provider and developer of investment analytical tools.
Similar estimates on the comparatively limited use of the tools by middle and small size money managers were given by others.
Yet, sales of investment decision tools are up sharply at the companies that supply them, including BARRA; Capital Management Sciences, Los Angeles; and Vestek Systems Inc., San Francisco. BARRA, for example, said sales are racing ahead at about 25% a year.
Large managers are adding to what they already own, and middle-sized money managers are increasingly licensing the new tools.
But the gap between large and smaller managers still remains wide even though some money manages describe the software as increasingly critical for management of pension, mutual, endowment and foundation funds because of the expansion of investment markets and the increasing speed of information flows.
There is a "proliferation of securities, increasing complexity of financial instruments and the tendency toward globalization in today's investment world," said James Pettit, an analyst with the brokerage firm Hambrecht & Quist, San Francisco.
Many money managers are looking for valued-added assistance. Some use analytical tools as "confirmation vehicles to support human choices on investment decisions," said Mr. Pettit.
Decision support tools "are very key in any decision," said Mark Tomko, manager of information systems with 1838 Investment Advisors, Radnor, Pa., which manages about $4.1 billion. If one of two money managers "can get information quicker, assimilate it faster and make sense of it in an easier fashion, then one of those two people is going to be an arbitrage statistic, and it's not going to be the one who has invested in decision support systems," he said.
One of the key tools used by Mr. Tomko's employer is a networked version of Capital Management Sciences' BondEdge fixed-income analytical system.
Steve Opp, a vice president at AEGEON USA Investment Management, Cedar Rapids, Iowa, agrees with Mr. Tomko: "We think (decision support tools) are critical. One of the major shortcomings any money manager can have is not putting together a comprehensive (support) system."
AEGEON USA, for example, uses Global Advanced Technology's Precision System in analyzing its mortgage-backed and collateralized mortgage obligation security investments. It has more than $25 billion under management.
Decision support tools are "crucial to investment decisions" at Dodge & Cox, San Francisco, said Bob Thompson, a vice president with the money management firm, which has more than $12 billion under management.
And, the very biggest money managers - like the mutual fund family Fidelity Investments, Boston - are literally "loaded" with investment support tools, said BARRA's Mr. Lakhani. Fidelity officials didn't return phone calls seeking comment.
Putnam Investments, Boston, uses valuation tools, research tools and portfolio analytics that can provide real time analysis for its more than $95 billion under management.
Its trading desk can execute trades in such an efficient manner that it can provide real time information on the impact of trades to portfolio managers and other traders, according to spokeswoman Janet Tosi.
In evaluating money managers, Paul Greenwood, an equity strategist with the pension consulting firm Frank Russell Co., Tacoma, Wash., looks at decision support tools as they relate to the manager's investment process.
"Our job is to make peer-to-peer relative assessments. When we talk with firm's peers, if we find (most of them) have certain technology that allows them quick access to particular information, and another firm lacks that ability and as a result is less quick to make its decision, then that becomes an issue," he said.
According to BARRA's Mr. Lakhani, decision support tools can help money managers find out what they are good at predicting and how much of their ability is skill vs. luck. Some of the programs can help the money manager determine the size of the risk he or she is thinking about taking in the market, and the possible upside or downside in investment return to that decision.
Money managers also can use decision support systems to generate ideas, said Ralph Goldsticker, director of product development at Vestek.
Even pension funds are buying decision support tools to get a look at the decision processes and evaluate money managers. The $50 billion California State Teachers' Retirement System, Sacramento, licenses tools from Vestek, BARRA and Capital Management Sciences.
Several reasons are given for why more money managers don't use these tools. Cost is chief among them.
For some, it's "a question of economics. Some firms can afford to have basically whatever they want. Smaller ones don't have the budget," said Gregory Kitter, a marketing director, of Dow Jones Telerate, Jersey City, N.J.
Some first choose to spend the money they have allotted to technology on back-office automation. They might even see investment tools as "scary" because they cost "a gazillion dollars a month per person," one money manager said.
According to Hambrecht & Quist's Mr. Pettit, the best software tools can cost between $30,000 to $50,000 a month.
Some tools can be had for much less because of their modular design, said Teri Geske, vice president for product development at Capital Management Sciences.
Some money managers have what Mr. Pettit called a "cowboy-orientation," and the use of software isn't integrated into their day-to-day decision-making process.
Some money managers are more quantitative than others, said Mr. Lakhani. They may rely on their intelligence to make decisions, but use computer programs to back up the thought process and as a safety device.