Chief investment officers (CIOs) are certainly no strangers to the important role data plays in shaping strategies, but with the vast volumes of data and choices of investment vehicles available today, being a brilliant investor can only take you so far – in fact, to the crossroad of data and the technology that can allow you to efficiently exploit it. It’s what happens then that can reshape a CIO’s point of view. II recently spent time with Clint Coghill, CEO, and Chad Erwin, Senior Vice President, Asset Owners, at Backstop Solutions, a global leader in providing cloud-based productivity suites for the alternative investment industry, and sought their insights on what’s happening at the intersection of data and tech, and how it is redefining the perspective of CIOs.
What’s the biggest change CIOs have to react to today?
Chad Erwin: We’re 10 years removed from the 2008 crisis, but because of it there’s significantly more information flowing through a CIO’s universe – a lot more data that they have to identify. And their parameters for identifying data have to expand because they’re getting more data points, and with more data points come more feedback loops. To truly see the factors that are relevant to them, they need the right technology to help sift through the data noise and to see that information in a normalized fashion as it flows in from varied sources and is interpreted by various people who want to convey those interpretations to the CIO. So, it’s one thing to have strong investment chops, but you do have to understand how you’re getting data and dig into why things are happening.
Can the manner in which a CIO receives data redefine their point of view – let’s say in the context of the potential end of one investment cycle and the beginning of the next?
Erwin: If you have a great team, and the right technological infrastructure and processes in place, you can capture the information you’ll need for when the playing field starts to shift or opportunities arise. For example, if the short-term rates start to go up – and we’ll see if that happens as many expect it will at some point – common sense will tell you maybe private equity shouldn’t play as big a role in your holistic portfolio, and – maybe – the pendulum will start to swing back to the hedge fund side. Or maybe it swings toward distressed or another investment vehicle that we’re not necessarily seeing yet. Regardless, if you’re building out your repository of knowledge all the while, you’ll be able to react to whatever happens. If you have a truly holistic view across your portfolio, and your qualitative assessment and analytics indicate there’s a chance that alpha might start to dwindle, you should be able to react and your investment committee should be able to understand what’s happening, and certainly you have solid professionals in place who have already been tracking the new opportunities, so you can get in front of whatever is happening as much as you can.
Clint Coghill: When there’s a shift in environment, having the power at your fingertips to get a feel for what your portfolio might look like a year from now is extremely helpful.When you can see everything in aggregate, you can start to at least hedge some things today, and have a plan of action should there be a material shock to the marketplace. It’s not so much the manner in which CIOs receive data that is important – what matters is what they do with the data to organize it and make sense of it afterwards. That requires getting data out of paragraphs and connecting qualitative to quantitative in a consolidated place. As Chad said, it’s key to have the right systems and technology in place, as well as the right team and processes.
There’s no shortage of choices in the realm of technology. What are the essentials for a CIO technology toolbox?
Coghill: Probably most important is the ability for whatever tools you do have to talk to each other. I think CIOs are taking a step back and saying, “Where is my organization today, and where do I want to go? What's the culture I want to build to not only generate the best investment performance, but also to make the best use of the entire team’s time?”
As part of that, CIOs are thinking about how to centralize all of the qualitative and quantitative information so their teams can collaborate, share, prioritize, and create a culture of consistency and compliance. When information is centralized, the team has actionable insights at their fingertips and can maximize the time they spend on high-value pursuits.
Everyone is talking about machine learning and artificial intelligence, but in order to use machine learning you have to turn unstructured information into structured information in some sort of a usable format. So, in some ways, it’s like the old crawl-walk-run maxim.
Erwin: The most valuable tools are ones that can adapt to how a CIO’s investment process changes and ensure they’re doing proper due diligence.
If you were to give a CIO a list of things their technology should be doing for them, what would be on it?
Erwin: It should be able to pull all the different sources of quantitative and qualitative data into one place so they can analyze it, so it has to be flexible. That qualitative data could be media information, investor letters, and analyst assessments of investment vehicles and sectors, among other things. You want to marry the quantitative and qualitative so you are alerting yourself based on historic quantitative values that are of concern to you and your overall exposures as they are getting aggregated up, but you’re also seeing it in how it relates to your own process. You want to be able to pragmatically analyze your decision-making process. A good system combines performance tracking and aggregates up your exposure, and allows you to understand if you’re making the right decisions.
Coghill: It should also be really useful for measuring a CIO’s self-performance. Some people like to do that because it’s how they’re compensated. Some people do it because they want to judge themselves against their peers or beat the benchmark, and some just want to measure against the best that they can be. Am I good at buying? Am I good at selling? Do I invest too early? Do I invest too late? Do I chase things? Being able to look at the performance, information, and history can really help you understand where your biases are and how they affect your decisions.