Money managers are looking to high-end software companies to help them survive in the complex and the sometimes financially dangerous $35 trillion global capital markets.
A fresh group of portfolio managers, at home with statistics and computers, is partly behind the trend toward increased use of financial software tools.
But complex financial instruments pushed out the door by Wall Street, and a few disturbing financial losses suffered by some portfolio managers, have convinced hundreds of money management firms and some plan sponsors to install sophisticated software that can analyze their portfolios, manage risk, and, in some instances, forecast returns.
Most of the leading providers of analytical software have been in the business since the '70s, and most were founded by academics, or others with strong mathematical backgrounds. A founder of Wilshire Associates Inc., for example, entered the business from the nation's space program.
Among the leaders in providing those programs are the following firms.
BARRA Inc.
1995 University Ave.,
Berkeley, Calif. 94704-1058
(510) 548-4374
Trying to better analyze their portfolios, more than 900 clients in 34 countries have turned to BARRA, the largest software maker of its kind. Benefiting from increasing interest in equity and fixed-income portfolio analytics among investors, the public company reported annual operating revenue increased to $52 million for the year ended March 31, 1995, from $44 million the previous year.
BARRA reported a 90% earnings increase for the second quarter ended Sept. 30 over the same quarter of the previous year. It was expected to report another large jump in revenue at the end of January.
Investors who use BARRA are sticking with its products. BARRA executives say 90% or more of its subscribers renew their licenses, which indicates extremely high client retention. Its primary revenue growth is coming from its core analytical modeling business, its electronic brokerage activities and its subsidiary, Symphony Asset Management.
European and Asian money managers are the sources of BARRA's fastest client growth, BARRA officials report. BARRA's branch offices stretch from Frankfurt to Sydney. A new source of clients is the defined contribution market, in which the focus on performance and risk measurement is expected to intensify.
BARRA, which grew from eight employees in 1978 to more than 300 worldwide, had an academic beginning. One founder was Barr Rosenberg, former business professor at the University of California at Berkeley. Mr. Rosenberg sold his interest in 1985 to Ziff Communications. The next year, 12 BARRA employees purchased the company from Ziff. Mr. Rosenberg remains a client of BARRA.
BARRA's current chairman and chief executive officer is Andrew Rudd, former professor of finance and operations research at Cornell University in Ithaca, N.Y., and co-author of the 1982 book "Modern Portfolio Theory: The Principles of Investment Management."
Mr. Rudd holds a doctorate in finance and operations research from the University of California, Berkeley.
Bolstering demand for its products, BARRA began last year releasing versions of its key products in Microsoft Windows format.
Recently BARRA released a Windows-based version of Aegis, its equity portfolio risk characterization and optimization software. Mr. Rudd said Aegis sets a new standard for risk analysis in helping money managers and plan sponsors assess risk and return trade-offs. Aegis is available with equity coverage for 11 countries and about 17,000 stocks. Daily pricing is available for the U.S., U.K. and Japanese markets, but Aegis coverage soon will be expanded significantly. (See accompanying story.)
Aegis helps users assess risk/return trade-offs through interactive, on-screen manipulation of data and graphics. It examines portfolio risk characteristics relative to any benchmark or market, and permits users to specify multiple screening criteria on databases to produce universes.
Aegis permits users to access fundamental data, including balance sheets, income statements and market-derived items. Users can interactively value derivatives and examine their impacts on portfolios.
BARRA recently released a new version of its equity valuation tool, Alphabuilder, that can build and test stock-picking strategies based on either the user's own research or BARRA's return models. Besides a U.S. model, BARRA has versions for the Japanese and U.K. markets.
BARRA also released a Windows-compatible version of its World Markets Model. The World Markets Model permits investors to identify the sources of returns in international diversified portfolios with currency considerations taken into account. The WMM permits users to examine total and active risk relative to any custom benchmark.
It measures the impact of portfolio changes from a local market and currency risk perspective. It identifies which assets are the least and most diversifying.
GLOBO, a fixed-income analytical product, is about to be replaced with a Windows-based version called the Cosmos System. Cosmos will estimate a term structure each business day in 21 different markets, including the European currency unit, Ireland, New Zealand, Finland, Norway and Portugal. Cosmos' coverage will include non-sovereign bonds. The current GLOBO database includes more than 500,000 securities, including an extensive database of collateralized mortgage obligations. The CMO model of GLOBO is fully integrated with portfolio analytics that include performance attribution, scenario simulation, portfolio optimization and multicurrency capabilities.
Capital Management Sciences Inc.
11766 Wilshire Blvd., Suite 300
Los Angeles, Calif. 90025
(310) 479-9715
Finding strong demand for Windows-based products, CMS in 1995 brought out a Windows version of BondEdge, its most powerful software system for analyzing fixed-income portfolios. BondEdge, a fixed-income security and portfolio analytical system, attempts to analyze more factors that affect a portfolio's value, including options, than other products. Less powerful fixed-income analytical products fail to capture the risk associated with interest rate changes, particularly in mortgage-backed securities and corporate bonds with options, according to CMS executives.
Heavy-duty analytical programs like BondEdge include prepayment models for mortgage-backed securities. Pre-payments critically affect portfolio total return simulations. BondEdge also provides index comparisons or other benchmarks critical for money managers.
Clients are responding to the Windows version and other CMS products. Subscriptions to CMS products have been increasing at the rate of 35% a year, according to CMS executives. The firm reported $13.3 million in revenue for the fiscal year ended June 30 from more than 400 clients.
CMS sells its products primarily to money managers, pension funds, mutual funds, insurance companies and commercial banks, and limits itself to products for the fixed-income market.
Some new features of BondEdge include historical portfolio and index analysis. The features are important marketing tools for money managers who need to show clients detailed past strategies and investment results. BondEdge subscribers can store and retrieve characteristics of their portfolios daily to compare with relevant indexes. BondEdge can produce a record of risk characteristics such as effective duration, convexity and yield. Subscribers also can view daily Treasury curves for the past two years.
The CMS database of CMOs includes more than 4,000 agency and private-label deals. For products BondEdge does not yet model, the client can provide CMS with the prospects and factor updates, if available, and CMS will add these deals to its database.
CMS has released what it calls its CMO online model for BondEdge for Windows. It permits clients to reverse-engineer their own deals. For relative risk management, CMS provides access to more than 130 public bond indexes - a feature unique to BondEdge, according to CMS executives. Other similar products don't provide the variety of public bond index providers. Bond indexes are completely modeled. Subscribers can create custom-weighted indexes or choose fully replicated indexes from Lehman Brothers, Merrill Lynch and Salomon Brothers.
BondEdge provides advanced risk measures for option valuation plus measures of risk on pre-payments, volatility uncertainty, zero volatility option-adjusted spread, spread duration and other measures. The risk measures help money managers find investment opportunities by more accurately accounting for the various sources of risk in securities and identify mispriced ones.
Trade ticket and transaction history is accessible in the what-if function of BondEdge. The features are important for broker-dealers or buy-side investors to study proposed trades. If they decide the investment is appropriate, they can electronically generate the trade ticket, which usually is done manually in other systems. BondEdge also has compliance modules designed to assist mutual funds, pension funds, banks and insurance companies with internal reporting and regulatory requirements.
Other modules for BondEdge include cash flow testing and liability management. An add-on to BondEdge is structured products for index comparisons.
James A. Kaplan is president and founder of Capital Management Sciences. He is a former vice president of Gifford Fong Associates and was a portfolio manager for Bank of America and Title Insurance & Trust Co.
In 1994, Capital Management Sciences was acquired by Data Broadcasting Corp., an international data communications company. CMS is starting to incorporate real-time information into its analytical programs.
Gifford Fong Associates
1 Walnut Creek Center
100 Pringle Ave., Suite 630
Walnut Creek, Calif. 94596
(415) 932-1910
A pioneer in fixed-income analysis software, Gifford Fong Associates has been building software products for fixed-income analysis on desktop computers for 20 years. Its current version of analytical products uses the Microsoft Windows NT operating system.
Its Genesis Fixed Income Systems features full risk analysis including duration, convexity and option-adjusted spreads; bond sensitivity analysis to multiple interest rate shifts and evaluation horizons; portfolio optimization using traditional strategies or creative user-defined hybrid strategies; and performance attribution with daily transaction accounting.
The latest addition to the Genesis system is its new derivatives module. Other application modules for Genesis include: a risk profile analysis module for portfolio and individual securities; a return simulation model that predicts security/portfolio behavior given alternative interest rate projections and changes in spreads; a multiple optimization system; a system for full CMO analysis; a performance measurement and attribution module; a term structure analysis module;and a database interface.
Gifford Fong Associates is a private company. Firm revenues are growing in excess of 25% a year.
It is involved in litigation support, particularly in the area of derivative product analysis. Other consulting projects the firm is involved in also require the application of software in analyzing securities portfolios and doing independent valuation of derivative products.
Gifford Fong Associates is also involved in a project sponsored by the World Bank to help China develop China's bond market. It is participating in the writing of a report on the economic reform of China, which is sponsored by the Joint Economic Council of the U.S. Congress. The report is expected to influence economic policy recommendations in China.
Gifford Fong Associates is the independent valuation consultant to Goldman Sachs, Swiss Bank and AIG Financial Products.
H. Gifford Fong is president of Gifford Fong Associates. He is a graduate of the University of California and has an MBA and law degree. He is on the editorial boards of The Journal of Portfolio Management and The Financial Analysts Journal, and is a co-author of the books "Fixed-Income Portfolio Management" and "Advanced Fixed Income Portfolio Management, The State of the Art."
Dunmu Ji serves as vice president and director of research at GFA. He holds a Ph.D. in applied mathematics from Brown University.
Global Advanced Technology
9639 Wall Street Plaza
88 Pine St.
New York, N.Y. 10005-1801
(212) 785-9630
Global Advanced Technology Corp. is a fixed-income research, consulting and software analytics firm founded in 1987 by Thomas S.Y. Ho and Mark Wainger. Mr. Ho, former professor of finance at New York University's Stern School of Business, is the developer of the Ho-Lee Model, an arbitrage-free rate movement model.
GAT executives say the Ho-Lee model is the most powerful framework to describe future interest rate movements that are arbitrage-free and based on observable market parameters.
GAT has more than 250 clients, including investment managers, mutual funds, broker-dealers and banks.
GAT gets 21% of its revenue from money managers, 8% from consultants, 21% from broker-dealers, 35% from insurance companies and 15% from banks.
Executives described the Integrative Bond System as the flagship product. IBS is a PC-based portfolio system providing option adjusted spread-based portfolio analytics, evaluation, simulation, total return analysis, optimization procedures, performance and return attribution analysis.
All securities are priced and evaluated consistently relative to each other.
The IBS database contains current information on securities and historical information from 1987, useful for back-testing and what-if analysis.
Securities not in the database but supported by IBS models can be input by the user manually or electronically.
For analyzing collateralized mortgage obligations and mortgage-backed securities, the firm offers its Precision System. Precision is a Windows product that includes pre-payment model OAS calculations, CMO portfolio capabilities and dynamic vectored cashflows. An add-on module called the Structuring Systems allows users to reverse-engineer a CMO deal with only the limited information provided on a term sheet.
Precision's databases include most agency and private label fully reverse-engineered CMO deals, geographic data on CMS' pre-payment data on all CMO deals and selected whole loan-backed deals.
Ibbotson Associates
225 N. Michigan Ave., Suite 700
Chicago, Ill. 60601-7676
(312) 616-1620
Ibbotson Associates, was established in 1977 by Roger Ibbotson, formerly a lecturer at the University of Chicago and now a professor of finance at Yale University School of Management.
Mr. Ibbotson did the original study "Stocks, Bonds, Bills and Inflation" with Rex Sinquefield in 1976, and the information from that study laid the foundation for Ibbotson Associates. Originally a consulting firm, Ibbotson Associates seeks to apply academic research to real-world investment. Ibbotson is a private company.
For decision-making and presentation, Ibbotson's EnCorr (Enhanced Communication of Risk and Return) is aimed at money managers, plan sponsors and consultants.
EnCorr, a Windows program, is a modular software system that integrates historical data analysis, asset allocation, performance measurement, style analysis, portfolio attribution and a variety of graphical and statistical analyses.
EnCorr is available with 24 specialized data modules, six of them for performance analysis. EnCorr components include an analyzer, optimizer, inputs generator and an attribution program. The components can run as stand-alone products.
Ibbotson's products include Ibbotson Quantitative System, a high-end quantitative decision-making tool aimed at quantitative money managers.
The Quantitative System's Data Reader is personal computer software to read, manage and integrate a broad range of data for use in historical portfolio modeling. The Data Reader is the first product to access U.S. equity data from the Center for Research in Security Prices at the University of Chicago Graduate School of Business.
The Data Reader is the first in a series of products for the Quantitative System. Other products are scheduled to be offered this year.
Vestek Systems Inc.
388 Market St., Suite 700
San Francisco, Calif. 94111
(415) 398-6340
Vestek, a major supplier of index and structured fund portfolio construction and management tools, has changed its fees.
In mid-1995, Vestek initiated a flat rate for unlimited access to its powerful online system and access to the complete set of its equity and fixed-income construction tools for structured funds, its valuation models and its portfolio management tools. The change from a fee based on time is expected to bring costs down for some clients with no loss of access.
Most other vendors of analytical programs and information offer products that are loaded on individual personal computers or a local server. But Vestek executives say one of their strengths is the tight integration of their tools and information where clients can rapidly switch from one tool to the next. A key advantage to their integrated system, they say, is that portfolio data is automatically downloaded from custodial sources and users don't have to worry about setting up an interface between the custodian and applications.
Consequently the data is already available for each and every Vestek tool, and the tools themselves are integrated.
Some clients have Vestek process customized reports and electronically send them.
A Vestek specialty is structured funds. Some founders of Vestek developed the first S&P 500 index fund in the early 1970s. Vestek has the tools to build structured equity, fixed-income, global and normal/benchmark portfolios. In the global fund category, its tools can build single country, regional, global, full index replication, stratified sampling and tilt funds.
Structured portfolios, such as yield tilt funds, control exposure to portfolio characteristics to achieve desired risk and return profiles. Vestek assembles the immense securities and index information needed into cohesive databases, and it supplies sophisticated modeling tools.
Using Vestek's Data and Screening Environment, clients
