Element22, a boutique data and analytics advisory firm serving the financial services industry, announced the results of its second benchmark study, which was conducted in partnership with Greenwich Associates and sponsored by UBS Asset Management.
This comprehensive study revealed explosive growth is anticipated in the use of advanced analytics and alternative data over the next three years but found that 77% of asset managers overestimated their advanced analytics and alternative data capabilities.
The study highlighted that asset managers are at varying stages of their journeys to develop robust advanced analytics and alternative data capabilities. The former principally includes Machine Learning (ML) and Natural Language Processing (NLP), with Smart Robotic Process Automation (SRPA) largely in trials. Some key observations from the study:
- Roughly 70% of firms remain in the early stages or have just begun their journey, but more than half of respondents reported that business stakeholders are satisfied or very satisfied with their data and analytics programs. This contradiction could be explained by modest expectations for immature programs, or it could indicate that asset managers are significantly overestimating their progress early on. Independent wealth managers expressed the greatest dissatisfaction with their advanced analytics and alternative data programs.
- Asset managers who are pursuing advanced analytics and alternative data strategies are investing heavily in their programs, with the four most aggressive managers investing 67% of the total annual investment made by the entirety of the respondents. In general, managers spend anywhere from less than $1 million to over $100 million annually with the median skewed all the way down to below $5 million. Last year, the top three firms reported 33% of total spend among participants on alternative data, ranging from $1 million to $100 million annually, with a median spend falling just below $10 million.
- While asset managers are making substantial investments in advanced analytics and alternative data today, evidence suggests an order of magnitude more will be required to realize sustainable value. Across all four investment categories surveyed, those in the early stages are, as a group, the ones most consistently planning to increase investments, with 90% reporting planned increases.
In terms of the application of advanced analytics and alternative data by asset management firms, the study found:
- Of the survey participants, 49% have an analytics strategy in place and 63% have one for data.
- 49% of those surveyed are using alternative data for the purposes of alpha generation, on par with 50% last year, while another 17% are in trials and proofs of concept (POCs).
- Last year, ML stood out as the most mature type of advanced analytics solution, with 90% of asset managers surveyed deploying it in some way. This year, 100% of the managers surveyed in the later stages of the journey are using machine learning to some extent and even 9% of the managers at the starting stage are generating value.
Asset managers tend to have a data strategy when they are in the initial stages of the journey and progress to both an analytics and data strategy as they mature to the middle of the journey and beyond. The findings suggest that asset managers have undertaken targeted trials and POCs as a means of learning, evaluating potential value, building skillsets and gaining buy-in while at the same time containing costs and risks. In the early POCs, asset managers experience more misses than hits, but it is the few hits that build confidence and generate the support that lead to much needed investment capital to build fully-fledged capabilities.
Commenting on the benchmark study, founding partner of Element22, Predrag Dizdarevic, said, “This year, by expanding the scope of our survey, we were able to assess a broader cross-section of the industry, revealing increased insight into firms at all phases of their journey in the use of advanced analytics and alternative data. A key finding is that many firms in the early stages overestimate their progress, but even the most advanced asset managers realize they will need to continue to invest heavily to find new ways of generating alpha, and they acknowledge this is a journey without a final destination.”
UBS Asset Management has been advancing the use of data and advanced analytics for 4 years on behalf of their clients and investment teams. In addition to sponsoring the benchmark report for the second consecutive year, UBS Asset Management served in an advisory role by providing guidance on the report’s rigorous research methodology, framework and content strategy, as well as insight into trends transpiring in the industry.
Thomas Heinzl, Chief Operating Officer, UBS Asset Management, said, “The research underscores the importance of investing in data and advanced analytics to drive efficiencies and process changes, along with the ability to generate returns. We began our analytics program four years ago by focusing on operational improvements, which allowed us to combine our own data with external data sources. By applying machine learning techniques, including natural language processing, we are able to enhance and augment the work that our portfolio managers and analysts do, demonstrating our ability to leverage technology to drive alpha for our clients.”
The Element22 Analytics Power 2019 report can be downloaded here.