LANSING, Mich. - The Michigan State Bureau of Investments is scrapping its 15-year-old paper-based portfolio management and trading system and going electronic.
``Our systems were old. We had patched things together and made changes over time,'' said Roy Pentilla, deputy director of the bureau, which is responsible for investing more than $50 billion in state retirement and other assets, about $41 billion of which is internally managed.
``It still worked, but it needed repairs. Currently we have a number of systems in place ... but we find that they don't communicate with one another.''
Michigan is making the leap to automation in a single step this year with the installation of Macgregor's financial trading platform - which, in addition to its sophisticated trade order management capabilities, also provides a link to Macgregor's financial information exchange network.
At the same time, the investments department is installing a portfolio accounting system from QED Information Systems, Marlton, N.J., for detailed reporting, trade reconciliation, performance measurement and analytics.
Michigan , Mr. Pentilla said, is like many investment management operations - manually intensive, with heavy reliance on paper, telephones and spreadsheets for conducting investment operations. But the state is not alone.
Officials at Macgregor estimate up to one half of the investment management industry still uses paper tickets to buy and sell stocks. ``The asset management industry is very conservative and risk averse,'' said Steve Levy, president and chief executive officer of Boston-based Macgregor.
Part of a trend
The Michigan upgrade is part of a trend among public funds, agreed Bob Leaper, principal at InvestTech Systems Consulting, Inc., Boston, an investment management technology consulting firm. ``There are a lot of older systems in the public funds area. Many state agencies are looking to get better detailed information on their trading activities,'' he said.
With the increasing number of electronic trading venues, instant communications, globalization, a shortening trade settlement cycle as well as the need for more detailed portfolio information, Michigan officials decided to move ahead
Mr. Pentilla said the primary motivation was not cost savings, although there may be some.
``We looked at it by asking what were the alternatives'' to not upgrading the system, he said. ``If we don't do it, it will end up costing us a lot more.''
The Macgregor trading system will serve as the front-end to a sophisticated integrated portfolio accounting system from QED. The Macgregor platform and FIX network operation deliver ``plug-and-play'' capabilities with QED, meaning it connects easily and is compatible with all the parties - brokers, electronic platforms, custodians and the like - that are necessary to manage the portfolio.
Michigan's order management system ``will allow them to move faster in the markets,'' said Mr. Levy.
For example, he said, the system will help Michigan portfolio managers to implement their investment strategy by building in management guidelines, and to model ``what if'' scenarios into their portfolios. They will be able to visualize the types of transactions - timing, costs and risk factors - needed to attain the model portfolio before electronically executing the order.
Tom Smith, head trader with the bureau of investments, said, ``System selection was critical for us because we didn't want to go through the labor-intensive process of building an in-house (order management system). We chose Macgregor because it is best suited to move us from paper to electronic trading and help us better analyze our equity trading strategies.''
Trading information from the Macgregor system is fed directly into the QED IMS 2000 portfolio accounting system, which then creates additional portfolio management information, reconciles transactions with State Street Bank, the bureau's custodian, and generates detailed portfolio reports, including daily stock positions, performance data and asset allocation information.
`Mutual fund approach'
Mr. Pentilla said the new system provides for ``unitized accounting'' for the four pension plans.
He described it as a ``sort of mutual fund approach'' in which the plans can buy and sell ``units'' in the 13 portfolios that will be priced on a net asset value basis similar to what mutual funds do, said Mr. Pentilla.
The unitized approach simplifies the investment process and allows fund managers to ``reallocate very efficiently,'' he said.
Dennis Case, QED business development director, said Michigan had ``unique'' portfolio accounting requirements. Under the previous system, each transaction in any of the 13 investment portfolios had to be broken down and allocated to one of the four pension funds, based on its percentage of ownership in the underlying asset pool.
The old system was ``not only paper-intensive, but more so because of their unique requirement that each transaction had to be multiplied by four,'' he said. The QED system also ``refreshes'' portfolio data each day ``so their traders know their correct positions each day when they get on the system.''
The new system has been installed in the bureau's Lansing offices and is being tested. Parallel trading is being conducted alongside the older systems, and the new system will become fully operational ``within a month,'' said Mr. Pentilla.