Expert vision, efficient execution

In increasingly complex markets, investment strategies must be constructed and executed with precision. Blake Evans-Pritchard explains why more investors are turning to third-party portfolio implementation platforms to maximise efficiency and impact

The appeal of third-party portfolio implementation platforms has grown significantly in recent years, as trading volumes have increased and financial markets have become more interconnected. They are being used by many different institutions, from very large asset managers to smaller boutique trading houses, but the role they have to play varies considerably between firms.

As markets have grown more complex, portfolio managers and investors have searched for more innovative ways to execute, manage and efficiently access investment strategies. Such innovations do not always sit comfortably within existing architectures. This is where portfolio implementation platforms – which cover trading, operational management and wrapping platforms – can lend a helping hand. Such platforms serve as incubators for new trading ideas and reduce investors’ risk management overheads.

“Execution, currency conversion, corporate actions, exchange margining, stop loss, risk management overlays – all of these things are, quite frankly, a distraction for portfolio managers and investors,” says Ahmad Chaudry, head of global platform solutions at UBS. “What more and more portfolio managers want to be able to do is to focus on their primary objective – the market analysis, the asset allocation – and use a third-party execution and wrapping platform to handle absolutely everything else.”

Increased capital flows into the financial intermediary segment of the market – combined with a corresponding rise in the number of independent asset managers – has also driven interest in portfolio implementation platforms. This trend has been especially pronounced in places such as Switzerland, Hong Kong and Singapore, but some non-Swiss European markets have also seen a noticeable rise in the number of smaller boutique firms offering new investment services.

UBS set up its own portfolio implementation platform more than 20 years ago, initially to service equity investors unable to handle the massive administrative burden of setting up everything from scratch.

Since then, the platform has expanded into a much broader offering, with nearly 1,000 portfolios running on UBS’s infrastructure. Investors can now use the platform for trading other assets besides equities, such as fixed income and commodities. UBS also offers futures and options trading.

“Being able to outsource execution is very important for what we do,” says Steve Chang, chief investment officer at JMC Capital, which runs portfolio strategies for family offices and high-net-worth (HNW) individuals across Asia. “Instead of going through a lengthy onboarding process with private banks, we can immediately provide investment solutions by leveraging on existing infrastructure. This gives clients the comfort that, from a risk and operations perspective, everything is being done correctly.”

One of the most recognisable components of portfolio implementation platforms is actively managed certificates, but the reach of these platforms extends far beyond this, to include actively managed swaps and other solutions as well. Most notably, there has been an extension into solutions that are more often described as synthetic managed accounts.

Evolving needs

The way users view third-party portfolio implementation platforms depends on the nature of their business and how they want to implement their portfolios. Chaudry divides sell-side clients into two distinct buckets: financial intermediaries – which include boutique asset managers, private banks and independent advisers – and more sophisticated asset managers, such as hedge funds. Buy-side clients include institutions such as sovereign wealth funds, pension funds, single-family offices and ultra-HNW individuals. These buyers either want strategies managed by sell-side institutions or may choose to run them entirely by themselves.

“Though not mutually exclusive, each of these users has a different need from the platform,” says Chaudry. “Financial intermediaries will typically be looking for operational support. They are not able to cope with the administrative burden of running their strategies. The more sophisticated asset managers already have this operational setup, but often use the platform’s implementation and delivery capabilities to develop new products and solutions for their clients. As for the buyers, many of these have identified asset managers who want to run their investment strategy, but they need support delivering it.”

Many users of portfolio implementation platforms find them a handy way of trying out new ideas, without needing to invest time and effort in building something from scratch.

“Using UBS’s Actively Managed Certificates platform, we have the flexibility to launch a new product with just a few million assets, enabling the introduction of innovative investment and hedging solutions into our discretionary portfolios,” says Stefano Varvello, head of equity strategy within the discretionary portfolio management of Azimut Investments, the largest asset management hub within the Azimut Group’s global network of more than 18 locations.

Some clients use UBS’s execution architecture as an incubation platform, launching a new strategy for relatively little upfront cost and then, once it is seen to work, building it at scale within their own organisations. Other clients have decided to scale their strategies within the UBS platform, avoiding the cost and effort of building something themselves.

“Both can work very well. It just depends on individual preference and the strategies being executed,” says Chaudry.

Investors are also increasingly turning towards portfolio implementation platforms to help them comply with regulatory restrictions or limitations that have been imposed by internal risk committees.

For example, under European rules for managing and selling mutual funds (the Ucits framework), short-selling can only be done in a synthetic format. Setting up a synthetic wrapper for Ucits instruments can be costly, especially if not done at scale. Using third-party services is a much cheaper way of doing this.

A second example where limitations can upset strategies is when investing in commodity futures, as doing so risks physical delivery of the particular commodity, which many investors are not in a position to receive. Once again, leveraging a portfolio implementation platform gets around this problem.

The third example Chaudry frequently sees is attempts by clients to introduce leverage into portfolios. Unless the appropriate floors are put in place, investment managers face running significantly higher risk for their clients. External execution platforms can help manage all of this.

“These are three simple but common examples of how external restrictions often mean that clients cannot run their portfolios in the way they want to,” says Chaudry. “This method of execution, implementation and delivery has a very convenient by-product that allows clients to comply with these internal and external rules.”

He adds that portfolio implementation platforms sit at the intersection of three different areas: quantitative investment strategies (QIS), prime brokerage and managed account businesses. UBS successfully straddles all of these views – a point Chaudry says is very important in this era of shifting investment priorities.

“What is intellectually very interesting to me is how everyone has a different view of portfolio implementation platforms that is strongly influenced by the genesis of that platform. Now, however, the lines have become more blurred,” he says. “Clients no longer think in terms of ‘boxes’. These days, they think in terms of a continuous spectrum. At certain times, what a client needs on the continuous spectrum may be closer to a classic QIS product. At other times, it may be closer to the prime brokerage or managed accounts businesses. These platforms must be able to deliver anywhere along that continuous spectrum.”

Delivery dynamics

There are a few things investors need to think about when pivoting towards portfolio implementation platforms. For example, one of the most important conversations UBS has with clients from the outset is what the investment wrapper will be.

“Is the client providing a UBS certificate, a special-purpose vehicle certificate, a swap, a bespoke fund that has been developed in-house? This is a crucial question because portfolio managers need to know how to access, and then potentially onward allocate or on-sell, that portfolio,” says Chaudry. “Users of our platform should ask: where do they want their portfolio to land? Do they want it to land within their existing fund? Do they want to be able to drag and drop the portfolio into client accounts? Does the investment need to be Ucits-compliant? The answer to all of these questions will determine what the right delivery mechanism is.”

Another important consideration is how information is exchanged between the portfolio implementation platform and end-users. A portfolio manager might need to place an order to buy 1,000 shares of a particular company, for example, and then receive a confirmation once this is done.

“There are multiple ways that users can interact with UBS – using our application programming interface, calling us by telephone or using the customer interface we have developed,” says Chaudry. “Whatever method they choose, the important thing is to make sure the information flow is working in a timely, operationally robust and efficient manner.”

The final point concerns latency. Is a strategy particularly sensitive to any lag that might exist between when an order is placed and when it is executed? While buy-and-hold investors might not mind too much whether an order is executed in one minute or 10, a millisecond delay in order execution could make all the difference for a high-frequency trader.

“The spectrum of clients we deal with ranges from those who need orders executed within nanoseconds through to those who just want orders to be executed by close of business the next day,” says Chaudry. “We have the tools to meet all of these needs, including the ability for latency-sensitive clients to trade directly with the cash execution desk.”

Future growth

As investors become ever more sophisticated and discerning, the appeal of portfolio implementation platforms is only going to grow.

“We have an increasing number of clients who no longer sit in what you might think of as the traditional asset management bucket,” says Chaudry. “They are no longer happy just purchasing a swap on an index or investing in a basket of stocks. They want to be able to cherry-pick from different strategies and then define how the investment should be delivered.”

This certainly resonates with asset managers and financial intermediaries in the market.

“We expect to further increase the volume of outsourced execution by developing new strategies that can only be implemented in such a setup,” says one portfolio manager from an international investment company. “Custodians, as well as service providers, are not easily able to handle broad universal strategies when they are not executing via third-party providers.”

Varvello from Azimut Investments says he doesn’t see this trend slowing in the market. If anything, he feels it is speeding up.

“Geopolitical effects, macroeconomic considerations, new policy frameworks – all of these affect dynamics in the market and mean we need to continuously hunt for new investment strategies,” he says. “Our infrastructure is already well built and well known, but portfolio implementation platforms help us achieve new payoffs and new structures in our global discretionary portfolios. They will continue to be a dominant theme in the years ahead.”

While users of portfolio implementation platforms usually have strong in-house investment capabilities, finding the competitive edge increasingly depends on how these capabilities are brought together.

“Of course you can still have innovation within the individual components,” says Chaudry. “The QIS teams will innovate in terms of content. The platform teams will innovate in terms of implementation and delivery mechanisms. The prime brokerage teams will innovate to provide the most attractive financing terms and inventory management. The execution teams will innovate in terms of access and speed. But how you connect and deliver these elements is now more important than ever.”

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