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portfolio management is becoming an applied science used
by the separately managed account industry to force the
technological development of mass-customized portfolio management.
This process has been labeled Portfolio Manufacturing.
Large, open-relational databases, fast, efficient, scalable,
computational power and web service, coupled with extended
Modern Portfolio Theory are producing a post-industrial
revolution in investment management. A new group of sophisticated
software products are integrating technology-driven production
lines into a few bundled processes to deliver sophisticated,
investment management products to their clients. As in any
manufacturing enterprise, production consists of raw materials,
manufacturing processes, product control and product distribution.
Portfolio Raw Materials
In portfolio management, the raw materials consist of
client portfolio preferences and return and risk investment
data. Client portfolio preferences may include static and
evolving tax circumstances, risk tolerances, soft and hard
security and sector preferences, income and cash requirements
and return targets, etc. There continues to be innovation
in the quantitative use of client preferences.
Return and risk investment data may include portfolio
models, buy/sell lists, security universe alpha ratings,
sector/asset strategies, and risk statistics and models.
This is the intellectual capital of investment management.
Portfolio Manufacturing Process
Scalable, efficient optimization software engines used
in many manufacturing and service industries, like the chemical
or airline businesses, are finding their way into commercial
portfolio manufacturing software products. The portfolio
manufacturing engine can range from rules-based optimization
to multi-variable optimization. Customization techniques
include security substitution logic, opportunity and threshold
ratios, and levers to choose individual client preferences
that balance tax issues, transaction costs, expected returns
and risk. Some portfolio manufacturing systems have developed
innovative processes to balance constraints and customization
with efficiency and scalability, a major concern for the
SMA industry.
Quality Control
Process and product quality control is a central part of
many of the new manufacturing packages. These segments stress
performance dispersion, tracking error, investment and risk
model dispersion, tax wash sale and short-term to long-term
opportunities and other new innovative ratios and statistics.
Quality control modules allow managers to easily concentrate
on exception portfolios greatly increasing productivity.
These systems even suggest remedies to portfolio quality
problems (out of policy, etc.) and then track workflow steps
taken by the manager to correct the deficiencies.
Distribution
Distribution of wealth management products as well as the
portfolio manufacturing process is being revolutionized
by the innovation of web services and ASP product. Investment
management firms focused on their core competencies and
through connectivity are outsourcing many functions previously
done in house. Technological evolution is leading to sophisticated
new investment products such as Multiple Strategy Portfolios
(MSP) and Overlay Portfolio Management (OPM). For reasons
of both cost and competitiveness, market leading firms are
researching and purchasing new, integrated portfolio manufacturing
software and restructuring their portfolio management process.
A Post-Industrial Revolution
So here comes the future, full speed ahead, propelled by
technological development and client demand and with great
opportunity for fundamental industry-wide change. Productivity
is at record rates of growth in the U.S. economy. The technologically
induced, post-industrial revolution is in full swing. Process
restructuring is rampant. The provision of investment management
services to demanding clients will not escape this revolution
and the portfolio-manufacturing concept will be a leading
driver of
change.
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