Somebody, somewhere, could be reading these words on a phone
while his or her car drives itself down the freeway. Perhaps
the driver (or, rather, the passenger) is headed out on a date
set up by an algorithm and was alerted to this
article because an artificially intelligent newsbot on a social
network determined it might be of interest. This is the
incredible world in which we now live.
Equally impressive, at least to me, is the speed with which
we integrate new technologies and discard old ones. Someone
told me recently that he loves his new Apple Watch because he
doesnt have to reach for his phone anymore to check the
time. The time, he said with a straight face, is right there .
. . on his watch.
To be fair, Im not immune to this kind of short-term
memory when it comes to technology. Im currently sitting
on an airplane, checking websites and responding to e-mails. I
fully expect onboard Wi-Fi and Ill admit it
would have been annoyed if I werent able to connect to
the Internet while going 500 miles per hour at 35,000 feet.
But while we as a society may be very good at adding new,
and dropping old, technologies, we as an investment community
are most assuredly not.
A few months ago, at a conference with 60 of the
worlds largest pensions and sovereign funds, I asked the
audience, How many of you have added a new piece of
technology into your investment decision process over the past
12 months? Fewer than ten had done so.
As it turns out, a list of todays dominant investment
technologies reads like its from the 1990s: Excel,
PowerPoint, e-mail, Bloomberg, Yahoo Finance, mobile phones,
messaging applications, and databases such as Oracle. All of
these technologies literally all were available
in 1996. The investment community is not utilizing the
technology of tomorrow or even today. Its stuck with the
technology of yesterday.
Why? I have some ideas. And my explanation as to why most
Giants are mired in the previous century has four key
propositions rooted in the behavior of four key stakeholder
Institutional investors: In 2016, I gave a keynote at a
conference for nonprofit investment organizations. Of the 300
or so in the room, 76 percent indicated that they believed
their world would be upturned in the years ahead by technology
start-ups. In light of this, how many do you think had some
sort of a formal policy in place to track start-ups and
technologies that could change their business? Zero.
Asset managers: Given the above, most Giants are totally
reliant on their service providers to invest in the latest
technologies that can deliver higher investment performance. As
a result, the hot new tech is built (or at least used) by
people who have no interest in sharing it; they instead
leverage it to extract higher fees. Most of the really valuable
investment technology seems to go into black boxes behind
closed doors or secretive asset management businesses,
purposely hidden away by organizations that have no interest in
its widespread adoption. Rather, they seek widespread
subscription to their funds.
Venture capitalists: The asset management industry generates
40 percent profit margins. Success within that field is
entirely dependent on informational advantages related to the
processing of data and information. In other words, asset
management is both ridiculously profitable and remarkably
vulnerable to technological disruption. And yet I cant
name a single venture capital firm that specializes in
invest-tech. Consequently, entrepreneurs dont consider
this a sector where they can be venture backed. And
Entrepreneurs: Tech entrepreneurs are barely aware that the
Giants exist. Id wager that every entrepreneur who has
ever considered building some new technology to augment
investment decisions or generate investment alpha has been
asked, Why dont you just start a fund
instead? Put simply, most technologists arent
building technology for mass consumption by the investment
community because Giants rarely come looking for innovative
companies with which to partner.
The complacency of Giants has disempowered entrepreneurs
(and their venture backers) from helping to solve big
investment problems of high value. At the same time, the Giants
have empowered asset managers to use technology as a means of
extracting higher rents.
If we ever want to see our pension funds using self-driving
portfolios or algorithms that introduce pensions to managers
and deals, we need to break down these silos and bring these
communities together in environments where all can learn about
one another. We also need institutional investors to start
being much more proactive about their technology and help
transition invest-tech innovation out of asset management firms
and into actual technology firms. To accomplish this, they need
to meet with new start-ups just as they meet with new asset
managers. They need to study emerging technologies just as they
study emerging markets. And theyll need to start taking
their own data, so long ignored, much more seriously.