Some midsize firms would rather handle data internally

Midsize money managers are looking within for their data management, countering the broader trend of those firms outsourcing overall middle- and back-office functions.

Regulations stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III are requiring money managers to keep a closer watch on their data, which can be anything from performance measurement to security categorization and compliance. Large bulge-bracket managers already have the capacity to handle these duties internally, sources said, but it's the midtier managers — those with $10 billion to $100 billion in assets under management — that face an issue of how and who should monitor that information.

“Firms are looking at what their high-value functions are, what they need to succeed,” said Marc Mallett, Naperville, Ill.-based vice president of product and manager services at SimCorp, an investment management software provider. “Having a good investment book of record, getting the best data they can for good investments, transparency for regulatory and client demands, that's why firms are moving” toward internalizing data management.

A SimCorp survey of 88 money managers released June 23 showed 53% aren't confident that investment performance figures they report are accurate, and 80% said portfolio managers do not receive investment performance numbers based on intraday position calculations. But 59% are able to determine trades, prices, foreign exchange rates and security classifications behind their portfolios' performance numbers. The managers surveyed had a combined $22.5 trillion in assets under management.

“We've found that getting at and managing the data is the root cause of investment inefficiency,” said Brent Beardsley, senior partner and managing director at The Boston Consulting Group, Chicago. “It means managers have to do a lot of reconciliation activity which is costly for them. Most managers are paying more attention to this. It's more of a capability and quality issue. (Data are) so embedded in what they do, they want to make sure it's done right and done quickly.”

Some midtier managers have created chief data officer positions, often senior level positions. “That's the governance piece. We've been seeing that role growing” in money management, said Paul McInnis, director of product strategy at data manager Eagle Investment Systems LLC, Wellesley, Mass. “Ten years ago, that position wasn't well-defined. Now there's a real centralized concern (at managers) on how data is managed. They realize that data is an asset, and are managing data accordingly.”

Brian Baczyk, chief data officer at Conning & Co., Hartford, Conn., said the firm handles almost all its data management internally, only outsourcing a small portion regarding identifying legal entities related to the securities it holds.

In the past six months, Conning formalized the organization of its data management group among the three staff members who had been working on it and other tasks. All three have investment management experience, Mr. Baczyk said.

Mr. Baczyk said cost, competitive advantage over other managers and control of its own data were the motivation for Conning to handle data management internally. “We know what's important to us,” Mr. Baczyk said. “(External) providers would have to hit that mark for us, and we think we can do that better. There's also a bit of a competitive advantage. We have a set of unique requirements that general providers don't address.” Conning had $95 billion in assets under management as of March 31.

As for control of data management, Mr. Baczyk said that's driven by compliance requirements. “Regulators demand accountability from our firm directly rather than shift the responsibility to a vendor,” he said.

That accountability could be seen as extending to cybersecurity as well, said Mr. Baczyk. “Regardless of how a company manages their data — either in-house or (has) outsourced data governance functions — a company still needs to have its own people with the right responsibility and authority in place to address cyber risk.”

Others said cybersecurity hasn't been a driver for internal data management — though it could be. “I've not seen cybersecurity as the primary reason for internalizing data management,” said Boston Consulting's Mr. Beardsley. “It's potentially a factor, but in my conversations in the market, I've not heard of this being mentioned as the driving force.”

Jack O'Connor, head of business development and client service at DDJ Capital Management LLC, Waltham, Mass., also said that cybersecurity concerns aren't a motivation for internal data management, although “the issue of cybersecurity is causing us to evaluate our systems and security protocols on a regular basis to ensure we are employing the best systems and methods to protect data.”

DDJ has refined its internal data management capabilities recently, although it's been monitoring data internally since the firm was founded 19 years ago, said Mr. O'Connor. “While outsourcing this type of oversight may be desirable to some firms, especially from a cost perspective, we believe that our firm would still need to dedicate a fair amount of time overseeing the process in an effort to ensure the most reliable data,” Mr. O'Connor said.

Mr. O'Connor said DDJ chose to internally manage its data “because of the nature of the types of investments that we make on behalf of our clients,” adding in-house data management “is in (clients) best interest.” DDJ managed about $8.3 billion in high-yield fixed income and leveraged loans as of March 31.

DDJ does not have a chief data officer, Mr. O'Connor said; those duties are handled by Joshua McCarthy, the firm's general counsel and chief compliance officer, who “has played an important role in the development of many of the improvements the firm has made around data integrity/management,” Mr. O'Connor said.

Outsourced data management firms have adapted to the insourcing trend, providing software for managers who decide to manage internally. However, some money managers, like Conning, have built their own proprietary data management technology and do not use software from outside providers, Mr. Baczyk said.

“Whether fully outsourced or insourced, managers still are the consumers of the data,” Mr. McInnis said. The money manager might retain analysis of the markets, reconciliation of accounts, performance attribution and the classification of securities. “It's bespoke to what a particular client wants,” he said.

SimCorp's Mr. Mallett said control is what drives midtier managers to handle data management, as is still the case with much asset servicing despite the overall outsourcing trend. “Some asset servicing has been outsourced recently, but the trend in data is heading back in the other direction,” he said. “In a post-crisis world, at the end of the day, managers want more control of the data and need to meet the demand of transparency. Whether it be from managers' clients or regulators, folks are demanding to know that your positions are accurate, where they are, and that risk controls are in place. When you outsource any of that, you're giving up control.”