Newsletter August 2018

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1 Newsletter August 2018 In this month s newsletter: New Stakeholders SBAI in Australia and New Zealand SBAI s latest event on big data and artificial intelligence Upcoming events New Stakeholders The SBAI is delighted to welcome a new addition to its family Investor Chapter Annuitas Management Limited (New Zealand) SBAI in Australia and New Zealand The SBAI concluded its summer series of institutional investor roundtables with events hosted in Melbourne, Sydney and Auckland this month attended by over 100 SBAI stakeholders from North America, Europe and the APAC region. The following topics were discussed during the panel discussions: Investor/manager perspective - Impact of current macro environment on investor allocations (trade war, emerging market volatility end of goldilocks environment?) - Shift in dialogue between investors and managers away from classic risk buckets to a more idea-driven dialogue - Co-investments as a means to access alpha and to reduce overall fees - Fee discussion: caring about returns after fees; optimising for lowest fees can result in missed opportunities/returns; importance of manager selection Specific investor considerations - Where to draw the line? Implications of doing more in-house within institutional investor organisations: cost of skill build-up, governance implications - ability to fire external managers vs. internal teams, keeping deal teams busy - Considerations for institutional investors with strong growth: scalability of programme, investment lead data strategy/roadmap, implications for investment systems - Collateral optimisation when most assets are managed externally: finding cheapest ways to raise cash to finance collateral demands (e.g. in derivatives portfolios), including traditional equalisation, securities lending, repo 1

2 - Competitive dynamics in the Australian Super industry, including monthly league tables does it drive shorttermism? Factor investing - Understanding the risk/return characteristics of different factors (Sharpe Ratios (e.g ), skewness, kurtosis, etc.) and why certain factors exist (paid for risk, paid for behavioural anomaly) - Criteria a factor needs to fulfil: robustness (out of sample), persistence, ability to implement, plausibility, lack of correlation with other assets - Investor approach to incorporating in portfolio: complement to existing allocations (completion mandate), but not looking at entire portfolio through the risk factor lens, some concern about pure reliance on historic data, implementation usually via managed fund vehicles. Cyber Security - What does an efficient & basic approach for medium sized organisations look like (see the Essential Eight of the Australian Cyber Security Centre) - Understanding of conventional attacks and how the Essential Eight protect against them. The SBAI would like to thank the panellists and speakers from Alyeska Investment Group, Annuitas, ASIC, Capital Fund Management, Dymon Asia Capital, Edgehaven Ltd, Future Fund, IBM, KPMG, New Zealand Government National Cyber Security Centre, New Zealand Superannuation Fund, PIMCO, QIC, Sunsuper, Telstra Super, Victorian Funds Management Corporation. A special thank you goes to our hosts Future Fund, PIMCO and New Zealand Superannuation Fund. SBAI s latest event on big data and artificial intelligence The SBAI held its fourth significant Big Data and Artificial Intelligence (AI) roundtable, following similar events in New York, Hong Kong and San Francisco. The event was hosted by Nasdaq in London and brought together over 80 leading practitioners from the US, Europe and China, with speakers from Amplitude Deep Learning, Hivemind, Jasper Capital International, Man Group, Marshall Wace, Nasdaq, Simmons & Simmons and Systematica Investments. The first panel explored the state of innovation in asset management: Human input is critically important in guiding the overall process AI programmes can only do specific narrow tasks. Big data characteristics include not just the volume of data but also the variety, velocity and noise in the data. All of this requires sophisticated techniques to extract the potential information content. The nature of (market) data means that we are not dealing with deterministic systems but with human (and machine) actors in the markets; so, one might not observe the same results over and over again. 2

3 The use case for neural networks includes identification/pattern recognition/classification and function approximation; there is discussion about the ability of neural networks to forecast price data for different time horizons. There inevitably is a challenge when training data hungry neural networks, including overfitting when training on data sets that are not (yet) large enough; there is a question about whether market data sets can be extended synthetically in lab environments. There is an important difference between deductive reasoning based on facts providing certain conclusions and inductive reasoning based on evidence (e.g., finding correlations/patterns) and which provides conclusions that are probable ( it s true until proven wrong ). Trade execution is an area where (systematic) managers have extensive internal and external data, and machine learning can help to calibrate trade algorithms continuously. Explaining the attribution from AI-directed investment strategies can be challenging because trading programme decisions can blur the lines between fundamental, technical and macro analyses (similar to human gut feeling). The second panel explored the data onboarding process, legal/compliance considerations and regulatory developments: There is a need to understand the overall data (onboarding) workflow in investment firms (including market scanning) and to get researchers interested in particular datasets; vendor due diligence, trial data agreements, mapping new data into firms internal data universe and ongoing delivery are also essential. There naturally must be a cost / benefit assessment of new data; there also are differences in approach between discretionary ( quantamental ) and systematic use case. There are a variety of approaches to organising data and inventory-taking to facilitate easy access/use across different portfolio management teams. Legal and compliance concerns include intellectual property considerations, detection of insider information and personal data o Assessing potential insider content when companies are selling data from their business o Concerns about exclusive data not made available to others o Risks and issues to consider when using crowd-sourced stock recommendations o Impact of GDPR and upcoming e-privacy regulation in the European Union on the datacollection abilities of brokers and other service providers The recent enhancement of use terms for Apple IOS third party Apps that collect data will result in better protection of user data and might restrict the sale of this data going forward. 3

4 As part of its important role in facilitating the development of good market practices, the SBAI will continue the exploration of this evolving topic at upcoming roundtables to help managers, investors and other market participants understand the state of innovation and implications for markets and participants. To read the press release, please click here. Upcoming events 26 September, London: SBAI Annual General Assembly This annual event will celebrate the 10th anniversary of the SBAI and will include two panel discussions focusing on culture & diversity, as well as institutional investor priorities. The speakers include senior representatives from Arrowgrass, Caisse de de po t et placement du Que bec, Canada Pension Plan Investment Board, Ontario Teachers Pension Plan, Sabre Fund Management, USS and Wadhwani Asset Management. 9 October 2018, Washington D.C.: SBAI s Culture and diversity in asset management Roundtable This event will explore best practices (what works, what doesn't and why), identify critical and emerging issues with a particular focus on the institutional investor perspectives as well as critical business and strategic issues for investment managers. 15 October 2018, London: SBAI Institutional Investor Roundtable at Albourne Annual Conference This mini-roundtable will be hosted within the framework of Albourne s Annual Conference. Confirmed speakers include senior representatives from Aspect Capital, Teacher Retirement System of Texas, Telstra Super and University of Southern California. 27 November 2018, Montreal: SBAI Institutional Investor Roundtable 28 November 2018, Chicago: SBAI Institutional Investor Roundtable Week of 10 December 2018, Tokyo: SBAI Institutional Investor Roundtable (tbc) 13 December 2018, Shanghai: SBAI Institutional Investor Roundtable The full event schedule is available here. More events will be announced in due course. APPENDIX Annuitas Management Limited Annuitas Management Limited is a joint venture company that oversees the administration and asset management of both the National Provident Fund and the Government Superannuation Fund National Provident Fund consists of 9 superannuation schemes and the Global Asset Trust, the Government Superannuation Fund is a group of superannuation schemes. Annuitas Management Limited is based in Wellington, New Zealand. 4

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