Money Managers Big And Small Dealt With Infrastructure Issues In '98

NEW YORK--Nineteen Ninety-Eight saw many fund management companies take long looks inward at their operations and overhaul them either wholly or in part. Some of the biggest firms were involved in such reviews, including mutual fund giant Fidelity Investments, which has often been the technology pacesetter for the rest of the industry.

At the beginning of the year, Fidelity took several affiliated software divisions and reassigned oversight of them to its venture capital unit (January 16). To some extent, the transfer indicated greater autonomy for the software marketing group, in that the group will seek external sources of funding. These new sources will include investments from other venture capitalists, although Fidelity maintained at the time that the shift would not interfere with the unit's operations.

But the transfer removed responsibility for the sales oriented group from Fidelity's Administrative and Investment Management Systems, or AIMS, the unit which handles overall technology support and development for all of Fidelity's operations. When Fidelity Technologies was formed in 1997, its charter was to leverage Fidelity's technology development and create an additional source of revenue.

The Fidelity Technologies group includes Advisor Technical Services, or ATS, the unit formed when Fidelity bought the AmTrust trust accounting software from Broadway & Seymour in 1996. Also made part of ATS was Devonshire Technologies, a spin-off run by Steve Campbell, a former technology executive at Fidelity.

The rest of Fidelity Technologies includes three other software products developed by Fidelity for its internal uses, Open Print Server, which manages networked printers and assigns printing jobs based on printer availability, Tracer 2000, which automates the search for Year 2000 flaws, and ActionSource, a tool that automates the updating of corporate actions for fund managers.

Fidelity was hardly the first financial institution to reassign responsibility for a third-party software unit. Most money center banks underwent technology infrastructure overhauls in the late 1980s and early 1990s, and some sold their units outright. But that transition was largely spurred by the recession and real estate crisis that plagued many banks during that period.

The changes at Fidelity are taking place at a time when the mutual fund business is still going strong, although Fidelity itself struggled for a couple of years as the performance of many of its larger and better known funds lagged that of rivals and its market share eroded through 1997 and into 1998. But rather than being driven by purely financial considerations, this change is largely being spurred by the revolution in technology and the growing availability of flexible applications and development tools throughout the investment management industry.

Unlike Fidelity, few other money managers generate substantial revenue from third-party sales of software. If any company comes close, its cross-town rival, State Street Corp., which owns Princeton Financial Systems. In the past few years, State Street has also acquired the Lattice equities crossing network and this year bought Askari, a risk management software and consulting firm (June 5).

But although State Street has bought several technology suppliers in a fairly short time, the company has no overall strategy to integrate their various products. Rather, State Street bought Askari to run it as a separate business.

Still, State Street wanted Askari because clients of the Boston-based asset manager and custodian bank were interested in risk management products and services, and State Street saw the addition of Askari as way of getting a leg up on its competitors.

Other money managers that grappled with technology infrastructure issues in 1998 were dealing with matters that were much closer to their day-to-day operations.

A good example was Franklin Resources of San Mateo, California, one of the leading publicly traded mutual fund companies, which saw its technology costs continue to soar through the first half of the year. In the second quarter alone, Franklin's IT budget was $45.9 million, compared to $29.4 million in the second quarter of 1997.

The chief culprits in the jump in spending were a massive transfer agency consolidation effort and the Year 2000 and euro conversions. The agency consolidation stems from Franklin's 1992 acquisition of Templeton Funds and its 1996 purchase of Michael Price's Mutual Series.

Franklin's experience was a clear example that even during a bull market, money managers are still struggling to keep a lid on their technology budgets.

But even though managers want to control their costs, they're still seeking more functionality. For example, Nicholas Applegate Capital Management finished revamping its trading systems, pre-trade analytics and compliance tools earlier in the year, and that readied it for a push perhaps this year or next toward real-time portfolio accounting (October 9). The only problem is getting such functionality is easier said than done.

At this stage, NACM has yet to map out a specific course for such an undertaking, and the effort will probably not occur until it has survived the euro conversion and Year 2000 upgrade. But the company's management believes that the investment industry's moves toward T+1 and globalization have all but mandated such a switch.

While most portfolio accounting vendors have recognized the need for real-time accounting systems, the suppliers also understand that implementing such systems requires a major technological overhaul, and the precise route to this goal isn't clear. But by this time next year, money managers and vendors may well find that real-time accounting is within their grasp.