No one could have foreseen the degree to which COVID-19 would disrupt lives, economies, and markets worldwide—or could we have? How can risk managers hope to hedge against future black swan events, those highly rare, high-impact, and widespread occurrences that shake up global markets and are only obvious in hindsight?
In FactSet’s latest research with Forbes Insights, we investigated how prepared asset, endowment, pension, insurance, and similar investment managers were for a pandemic on the scale of COVID-19. How agile, creative, and successful were global executives and their firms in crafting their response to a crisis that was—and is—disrupting lives, economies, and markets worldwide? What strategies, technology, and tools contributed to positive results—and what hindered performance? For added context, we interviewed FactSet thought leaders Robert Robie, EVP of analytics and trading, and Dr. Boryana Racheva-Iotova, SVP and senior director of research, risk, and quantitative analytics.
Previously, we explored the growing need for changes to core risk strategies that would enable risk managers to pivot when faced with extreme volatility. Here we’ll examine how the pandemic has influenced changes in risk technology.
While there were already noticeable upticks in technology investment and focus before COVID-19, says Robie, once the full economic impact of the pandemic crystallized, “it acted as a catalyst, forcing firms to reevaluate how they’re investing in and thinking about technology.” In fact, 63% of survey respondents say learnings from COVID-19 are driving their risk management technology investment and development decisions. Seventy-one percent of firms are expanding their technology budgets and investments across the board.
With context from Robie, our survey shows three key trends that all asset managers and owners should keep in mind when evaluating their risk management technology infrastructure.
1. A Shift Toward Enterprise Solutions
One of the clearest and most deliberate changes in technology strategy is the shift from disparate, distributed technology platforms toward enterprise solutions. According to our survey, 75% are currently acquiring or implementing an enterprise risk management solution.
A 2019 iteration of this FactSet/Forbes Insights research showed that this trend was already underway before the arrival of COVID-19. According to that survey, more than six in ten (62%) executives said it was likely they’d acquire a holistic investment risk management solution within two years, demonstrating the shift away from point solutions.
The pandemic created a new sense of urgency for a more holistic approach to risk management.
The pandemic, however, created a new sense of urgency for a more holistic approach to risk management. Pre-COVID-19, just 12% of firms described their technology platforms as centralized and integrated, but going forward, almost four times as many (44%) are committed to this as their desired future state. Notably, 37% of firms that performed poorly during the pandemic cited the lack of a holistic approach to risk management as a leading factor, while 40% of those who did well cited their holistic approach as a key contributor to better performance.
These numbers come as no surprise to Robie, who says, “Firms are keenly interested in the ways enterprise platforms can help deliver a more holistic view of investment and risk management performance.”
Today, asset managers want to obtain what Robie refers to as a much clearer line of sight: “Firms want to be able to look at the entire plane, understand the correlation of the entire plane, and be able to clearly see and understand which risks various assets display independently and which risks the investments have when bundled as a whole so they can better manage both discrete and collective risks.”
Achieving a line of sight means a firm can see the whole of their enterprise’s risks or that of any of its pieces as desired. In doing so, firms will, from the start of portfolio construction, “know whether they are meeting their investment mandates, their firm’s mandates, any regulatory restrictions they might have, and what that looks like in terms of factor risk and performance challenges,” says Robie.
2. The Need for Flexibility
One of the long-standing criticisms against centralized technology platforms is that while they can deliver standardization and an enterprise view, they aren’t as customizable. However, today’s technology is evolving in ways that make it possible to find the best of both worlds.
“What we’re seeing today is firms looking for integration but at the same time access to a wide range of functionality,” says Robie. “So when they look at a platform, they’re asking, ‘How flexible are these applications? Can we tie into other third-party data sets or work with APIs? Can we work in open source?’”
Similarly, firms need to know whether their system can accommodate existing legacy platforms across the organization that may be preferred or specialized for teams. Recall that although the shift toward enterprise solutions is clear, 73% of firms are still acquiring new point solutions—up from 62% in the 2019 survey.
Robie says that companies should look for platforms that are “configurable.” Bottom line, “What we want isn’t a black box. We’re looking for enterprise solutions that are open and flexible.”
The drive for an open and flexible technology infrastructure has been catalyzed by the shift toward a stay-at-home economy brought about by COVID-19.
It cannot be ignored that the drive for an open and flexible technology infrastructure has been catalyzed by the shift toward a stay-at-home economy brought about by COVID-19. With “pandemics” being the disruption executives fear most, many are calling for more investment into technology that allows for an easier and more efficient working-from-home environment. Along with investing in enterprise and point solutions, almost 80% of firms said they are highly to significantly pursuing the implementation of a data cloud. For example, one executive states that their biggest opportunity is, “to invest in cloud platforms to build virtual data centers that can be accessed remotely by our global footprint, to improve speed and agility.” When asked about the one thing they would change in their risk management preparedness, another states, “setting up cloud software applications and communication tools to ensure seamless working during a crisis.”
3. Revisiting Build Versus Buy
The survey offers one final set of technology insights: 74% of firms are expanding their technology hiring with the same amount also spending more on technology training. Firms appear equally invested in building their own technology as they are in outsourcing to vendors.
80% of survey respondents say they are implementing leading-edge artificial intelligence, machine learning, or related technologies.
Two trends that could be influencing this are new technology for better analysis, as well as better security measures. Eighty percent of respondents say they are implementing leading-edge artificial intelligence, machine learning, or related technologies and 72% are streamlining processes through robotic process automation or natural language processing, all of which are key to strengthening risk analysis and stress testing.
As technology advances and is embraced, firms need more tech talent, but to what extent should companies be taking tech matters into their own hands? As Robie explains, “We are seeing a number of large asset managers and even asset owners moving more aggressively to an open technology framework with a build plus buy approach to ensure their platforms meet their firm’s objectives.” Firms “are hiring engineers and financial professionals with coding backgrounds across a wide range of technologies because they want to create an ecosystem that matches their investment mandate.”
In general, Robie believes that technologies are evolving to be more open and flexible, “and that makes it easier to construct a financial solutions ecosystem that fits firms’ specific needs.” The pre-COVID-19 iteration of this survey backs this up: flexibility (69%) was rated as one of the most important factors when considering risk management technologies, topped only by market data availability/integration (71%). But for the most part, what Robie sees is that firms are learning how to work more closely with their vendors to achieve their technology visions. This is supported by the fact that executives whose risk strategies performed well during the pandemic cited “collaboration between business and technology partners” as the top contributor toward better performance.
The balance between build-it-yourself versus buy will be different firm by firm, but what is key is making certain that whatever platforms put in place are flexible enough to adapt as needs and conditions change.