A cutting-edge software system designed by State Street Bank & Trust Co., Boston, for bond portfolio managers so far has fallen short of important expectations at a key test site, GE Investments.
The experience exemplifies the difficulties, frustrations and disappointments often encountered in developing advanced computer software, and how it's often much harder and more time-consuming than expected for developers to deliver promised capabilities.
Nevertheless, the new system, called FolioExpert, might already be giving GE Investments an edge over its competitors.
The system is so advanced that GE Investments officials see themselves as testing the limits of current investment technology in getting security trading impact and what-if analysis for billion-dollar fixed-income portfolios before anyone else.
Although the situation might change, so far the test is "not an overwhelming success story," said Richard Farrelly, a vice president of system and support operations at GE Investments, Stamford, Conn.
Mr. Farrelly, others at GE and top software design engineers at State Street Bank have been working for more than two years on FolioExpert.
As of today, the system is "very good" as a flexible, back-end reporting tool for bond portfolios, said Mr. Farrelly.
GE Investments' bond portfolio managers can look at their portfolios in many different ways and have more accurate reports on their portfolios than ever before, he said.
GE Investments manages about $10 billion in fixed income for tax-exempt investors.
How FolioExpert works
FolioExpert generates its reports after automatically combining various sources of information from top-name vendors of securities data like Bloomberg Financial Markets, New York. Instead of having to pencil in pricing and descriptive data on portfolio reports from custodians using varied sources of data, FolioExpert delivers the reports automatically, using the combined sources overnight.
FolioExpert can do that because State Street Bank built interfaces to convert data to a standard industry format.
Data conversion is common in ordinary software products like the spreadsheets Lotus and Excel but extremely rare from top securities data vendors.
FolioExpert will save GE Investments about four hours a day. But GE hasn't seen that savings yet, because only now are GE portfolio managers comfortable with the reports, said Mr. Farrelly.
Having accurate data, especially pricing, is critical to a bond portfolio manager.
In time, Mr. Farrelly said, FolioExpert will be delivering customized reports to clients at the push of a button.
But after what Mr. Farrelly calls a "challenging" experience for both GE Investments and State Street Bank, the system lacks several things GE wanted most, although Mr. Farrelly said there is debate over what was included in the original specifications.
He said thus far, FolioExpert doesn't provide real-time or virtually instantaneous information on the impacts of trades that GE bond portfolio managers make.
And it doesn't provide real-time information on hypothetical trade analysis or virtually instantaneous information on how a portfolio would be affected if potential trades were actually completed.
While these are just two functions, they are so essential to what GE hoped for that Mr. Farrelly said he would be reasonably satisfied if GE could get the information in a few hours. Instead, he doesn't get the impact until the next day, and he isn't completely satisfied with what analysis GE does get from FolioExpert.
James MacDonald, senior vice president for information technology at State Street, contends the real-time functions do exist.
He said with FolioExpert, an investor can "see exactly where he is real-time for the immediate processing of input." Mr. MacDonald said the software will be enhanced at GE to permit sensitivity analysis.
FolioExpert accepts transactions in real time now, said Mr. MacDonald. GE Investments uses Bloomberg and Merrin Financial Inc., New York, as their trading systems, and the information from them does flow into FolioExpert in real time, he said.
Another step will be needed to give GE Investments sensitivity analysis in real time. State Street Bank intends to give GE Investments that ability in the third quarter through a new release of FolioExpert.
Mr. Farrelly said he is aware of what State Street Bank is saying about FolioExpert delivering information in real time and is only communicating his experience.
More time savings wanted
The key difference between what FolioExpert does and what GE wants, said Mr. Farrelly, is in the time FolioExpert takes to do its job. When billions of dollars are being managed and time is limited to make decisions, a few hours can be critical.
In the meantime, GE bond portfolio managers are leaning heavily on Salomon Brothers Inc.'s analysis software Yield Book for much of its portfolio analysis.
Mr. Farrelly said because of other experiences, he is cautiously optimistic about State Street Bank meeting deadlines for FolioExpert. He said when GE asked State Street to build the software in January 1993, his expectations were flying high.
"I think there was a lot of reluctance on our part to keeping the list of things we wanted to something manageable. There were a lot of real high expectations. I wouldn't go so far as to say they were unrealistic (expectations) on our part, but we were certainly pushing the envelope. In so many words, we said 'we want everything.'"
Software design experts at the bank might have agreed too quickly to provide what GE wanted, said Mr. Farrelly. He believes the situation "kind of got out of hand on both sides."
The software design project itself, he said, was complicated by many computer hardware and network issues.
"We are a tough cookie (to please) because all of our clients are tough cookies with us," said Mr. Farrelly. He said State Street Bank started with "a blank sheet of paper, and 11/2 to three years later they have a pretty darn good product out there. But it is a product to me that has a lot of promise more than anything else."
Both sides 'made up'
After some acrimony, people working on FolioExpert at State Street Bank and GE have kind of "kissed and made up," said Mr. Farrelly.
He said State Street Bank executives showed dedication and fortitude on the project from the start, "and we worked well most of the time as a project team. We stumbled at times, disagreed at times, and still would like to see the system do a lot more."
GE is using FolioExpert for portfolio holdings and trades analysis now.
With the next release of the software, GE Investments will have one of the most advanced systems for determining precisely where its bond portfolios stand in the market as a result of trades, Mr. MacDonald said. It also will be able to analyze immediately what impact potential trades will have on its portfolios.
Usually, said Mr. MacDonald, groups of people at investment management operations are spending 80% of their time keying data from various sources into their portfolio management system and 20% of their time making investment decisions.
What the typical money manager is seeing is information about his portfolio that is "several hours old at best," said Mr. MacDonald.
Instead of keying in data, he said, FolioExpert reverses that time expenditure so money managers can "concentrate on analysis."
Not only will FolioExpert be helpful for bond management, but it also will be helpful for equity portfolio management, according to Mr. MacDonald. He said State Street is targeting FolioExpert to big pension funds as well as about 200 money managers and mutual fund investors with more than $10 billion under management.
Although he hasn't seen the program, Mike Getter, a vice president for fixed income at Pacific Investment Management Co., Newport Beach, Calif., said the software sounds like "it would be a benefit." PIMCO, with $58 billion, is one of the largest U.S. fixed-income managers.
FolioExpert appears to be an important product for State Street Bank. The bank, best known for its custody services, is moving into software development.
State Street's Mr. MacDonald said GE Investment isn't the only client for FolioExpert, but he declined to identify others.