Broadly across Asia, portfolio investment flows into the region have reached an unexpectedly high level of almost $ 58 billion in the first quarter of 2017, according to the Institute of International Finance. With some markets facing negative yield, yields on India sovereign bonds are among the highest in Asia. With this new trajectory of India's financial markets, asset managers in India need to be prepared for the continued inflow of capital, and leverage smart technology to support their expanding portfolios.
A new investment landscape
Over the last decade, the Securities and Exchange Board of India (SEBI) has mandated a series of regulations for financial reporting. The financial crisis, in turn, has driven investors to scrutinize how their investments are managed and seek clarity on investment products. This has impacted the functioning of buy-side institutional investors in India.
The Modi led government has also transformed India's investment landscape, adopting a slew of measures to strengthen its financial markets and divert the flow of cash from traditional investment avenues of real estate and gold, to REITS and Gold ETF (exchange-traded funds). Money managed by local ETFs has almost tripled to $ 6 billion in the past three years, the fastest pace after Japan, data from the Association of Mutual Funds in India show.
If you look at India's buy-side, it is clearly undergoing change and consolidation. In its bid to protect the retail consumer, SEBI has cut TERs (total expense ratio) for funds and is pushing for further consolidation of mutual fund schemes. As a result, asset management companies now need to scale AUMs to remain profitable. Not only has this led to a wave of consolidation, with the number of asset managers down to 36 from 43 a few years back, it has also kick-started a race to achieve greater operational efficiency. Asset managers are doing this by adopting technology to streamline operations including complete front to back order management systems and electronic order routing.
AUM volumes for the industry have risen, growing five-fold in a span of less than 10 years. With consolidation, growing AUM, and a more developed investment landscape, it is time for India's asset-managers to re-evaluate how technology can play a strategic role in helping them manage growing, more diversified, multi-asset portfolios.
Buyside technology spend
Globally and in India, we are seeing a few clear investment trends. First, there are higher thresholds of accountability with the buy-side due to changes in the regulatory landscape. Financial regulation has meant that investors need greater transparency, independence and accountability. Dodd Frank, Basel III and MiFID II have fundamentally changed the way markets operate globally. In India, SEBI has proposed measures to tighten regulation and accountability of investment advisors so compliance has been top of mind for the buy-side.
Secondly, investors are getting more sophisticated, demanding more bespoke solutions and adopting more quantitative investment approaches. Some are even bringing assets and systems in-house.
Thirdly, technology is playing an increasingly important role in fund management and in shaping financial markets. The proliferation of data and analytics is driving investment strategies, and greater computational power is spurring demand for greater scale and flexibility.
As illustrated in a recent Greenwich report, the risein technology spending by the buy-side has been driven by regulation but also by operational efficiency. Buy-side firms around the world are seeking the latest technology to preserve alpha, meet investor demands, and to keep operating costs low.
Future of Buyside Technology
As India's investment management process becomes more complex and as passive investing emerges as a key trend, buy-side firms are increasingly challenged to generate returns. They also have to adapt to new demands of increased transparency and the need for timely and accurate data for financial reporting. All of this is driving investment companies to adopt and adapt to new technology to be more innovative and efficient.From a technology perspective, it is encouraging to see Indian buy-side firms transitioning from a build versus buy stage, towards buying best-of-breed systems and now seeking end-to-end technology partners.
The author, Sunny Chhabria is Head of Bloomberg, South Asia