Buy Side Deploys New Tools, Software Provides Higher Returns

If 1997 demonstrated anything, it was that seven years into a bull market is hardly a time for asset managers to rest on their laurels. It may have seemed odd, but the unprecedented returns achieved for most of the past decade sent buy side firms looking for any software tools they could latch on to that would give them the higher yields investors are always after.

Even the biggest firms are racing to meet this demand for higher returns, and many are using analytical tools to do it. Some are buying the developers of the software outright, while others are willing to settle for shrink-wrapped copies of vendors' latest analytical packages.

When State Street Bank acquired a majority interest in Advanced Investment Technology of Clearwater, Florida (November 21), it picked up much more than a small team of expert fund managers, it also gained the rights to the firm's quantitative analytical techniques that the bank hopes will push its portfolios to outperform the market.

AIT was founded in October of 1996, and it manages $180 million in pension fund assets for some Fortune 100 firms and high net-worth individuals. Its portfolios are conventional and mostly invested in mid-cap and large cap stocks.

Something must be going right. AIT's portfolio managers have been beating the S&P 400 mid-cap index by about 200 basis points for the past four years. The managers began employing their non-linear analysis while they were still with LBS.

While State Street went out and bought a quantitative analysis boutique, Prudential Investments simply purchased a copy of Eye Street Software's Miami (August 1).

Eye Street's management says that Miami's data warehouse approach simplifies quantitative decision making by providing investment managers with instant access to a consolidated set of data and analyses.

Prudential purchased and then modified Miami to provide its portfolio managers with an integrated research tool to deal with the avalanche of data in today's markets.

Vendors were hardly content to sit on the sidelines and watch money managers scramble to come up with the best tools. Software developers set about trying to provide the market with the tools managers have been after, often by acquiring other developers.

For example, Barra, a Berkeley, California provider of analytical models acquired fixed income research and technology firm, Global Advanced Technology June 6. The move gave Barra a fixed-income product suite that, along with its existing equity, fixed income and asset allocation products, forms the bedrock for a broad portfolio analytic product line.