Lord Abbett Strives to Build Agile Operations Infrastructure To Control Risk and Customize Offerings for Global Clientele

Originally published March 31, 2008

Lord Abbett, a privately held investment management firm with $110 billion in assets under management at year-end 2007 in mutual funds ($58.5 billion), institutional accounts ($31.8 billion), and sponsor-driven separately managed accounts, organizes its business along three broad areas: asset management or manufacturing, which comprises 18 investment teams and traders; marketing and sales distribution; and core services including, operations support, administration and accounting. The firm, which follows a traditional long-only philosophy, invests globally in publicly traded equities and fixed-income securities and derivatives, including credit default and interest-rate swaps, interest-rate futures, and currency forwards. Global Investment Technology spoke with Joan Binstock, Chief Operations Officer, who oversees all operational support for the portfolio managers and traders, as well as sales and distribution support, as the partner in charge of operations, administration and accounting.

GIT: What are the competitive dynamics and business drivers shaping the investment management industry?

JB: The asset management business continues to be more complex with respect to supporting our global investment strategies and our global client base. To be competitive in our marketplace, an asset manager needs an infrastructure that can support the customization that clients demand. The securities we are buying on their behalf continue to challenge the operational support in their complexity. It’s much easier to have the operations and technology infrastructure to support a US equity than it is a credit default swap or floating-rate bank loan.

Conversely, we are selling our asset management expertise through global distribution channels – institutional and retail. Understanding our client, knowing who our client or retail shareholder is, and understanding local requirements pose additional challenges. With respect to knowing who your client is and having the required transparency to do so, when we manage 401(k) program funds as part of a platform, we have little information on the underlying shareholders.

The Lord Abbett approach, particularly in a competitive market, is that investment performance obviously matters — but we also believe our approach toward our client also matters. So, the more we understand our client-base, we believe, the better we can provide the information and support those our clients demand.

The competitive dynamics and business drivers in this industry have stayed more or less the same. It is the pace of change and market complexity that is different. In other words, to be competitive in the marketplace, a firm’s infrastructure requires the flexibility to meet the customized needs of each of its clients with respect to investing, servicing and reporting.

GIT: What are the unique challenges of operating globally?

JB: There are two components to your question. First, we need to understand the markets we’re investing in and have the requisite systems to support straight-through processing (STP) and the data or information needed to invest globally; moreover, we need to have these abilities on a 24-hour basis. The second part of that question concerns serving investors globally. To have clients globally, which we do, firms need to understand the local customs and regulations for each client and prospective clients. The operational support is no longer one size fits all. Infrastructure to support a global client base requires a significant investment. We have looked to vendors to provide many of the technology solutions. For instance, in the UK, the transfer agency or record-keeping systems required to perform shareholder recordkeeping work quite differently than in the US. Simply adopting a US transfer agency platform was not an option. We looked to vendors, and ultimately, outsourced service providers for the necessary functionality. We have faced many similar examples in European and Asian markets. So it’s understanding the local market you are operating in and then proceeding with the right operational and technology support.

GIT: What are the biggest information gaps that you want to lose?

JB: Having the attributes of all the securities that our portfolio managers are interested in investing in is really important, and then being able to display those attributes to our clients, so they know what we purchased on their behalf. It sounds simple, but it’s actually quite a challenge. One area that we focused on the last few years is a data integrity initiative, to ensure that the information on the securities we transact and the clients or shareholders we sell to are correct.

GIT: When was the data integrity group launched? What was its objective?

JB: It was initiated approximately two years ago. Sometimes when we think about data, we assume they are oriented toward a single system, but in fact data tends to have a life of its own as it moves through different systems in the organization for different purposes. We recognized the need to have an independent perspective on the critical data that flows through the enterprise. The objective is really to ensure the end-to-end view of any given component of data as it moves through the shop. There may be a lot of users and needs for that data.

It could be the salespeople trying to explain the attributes of a portfolio, it could be our clients, or it could be our compliance people. We had technology and operations staff focused on data integrity, but we realized it needed a dedicated team. Often, doing something new and different has a ripple effect as it travels through the organization and our technologies. So this team has become pivotal every time we do something new. If we invest in a new instrument type, or anything else, that team will pull together a cross-functional group of people and ensure that we have a holistic view of what the data needs are and what the data impact is of that new initiative across the firm.

GIT: What are your thoughts on operations outsourcing?

JB: We have outsourced our net asset value calculations on our mutual funds. We have outsourced our transfer agency on our mutual funds. We also have outsourced some of the reconciliation activities for our institutional accounts. But at no point in any of these outsourcings are any of our portfolio managers, salespeople or clients speaking directly with the outsourcers. The primary objective of those outsourcings was to mitigate risk and for us to incorporate best practices expeditiously. We consider the cost to develop our own technologies as compared to vendor solutions. If a proven vendor solution exists at a reasonable cost, we consider it.

GIT: From a COO point of view, where do you think the biggest technology challenge lies? Is it in research? Trading? Post-trade operations? Data management? Risk management, or other areas?

JB: It’s all of the above, to be honest. We are very focused on controls at Lord Abbett. Simply because a control works on one set of transactions, does not mean it will work the same way on a different set of transactions. So you have to challenge the kinds of controls you put in place, which means you need to hire people who will ask the right questions about the controls in place — should we do something differently than we did the day before? When you trade in non-US markets, there are different fees, customs and commission rates, so our people have to look at the information they receive and learn to ask different questions about it. All the functions you mention continue to be a challenge because the industry is not constant. Markets continue to change. The data points we get on a given day vary. Patterns change as well. When the markets experience significant volatility, the questions you have to ask about the information you review are different than if the market was relatively even.

GIT: In your role as part of SIFMA’s Asset Management Group, what are the most important issues for the asset management industry as a whole?

JB: At the most recent steering committee meetings, we discussed “defining best practices” and talked a lot about risk mitigation, particularly as it relates to regulatory risk. We are looking now at what are the best practices around valuation methodologies. Our focus is on valuation methodologies as they relate to more complex or exotic securities. Pricing a credit default swap or OTC option or pricing a bond that hasn’t traded in the last few days is more complicated.

GIT: In five years, how might “Best Practice” be re-defined in the dynamics of your business today?

JB: I am not certain it will be defined differently than it is today, perhaps just more challenging to achieve. Comprehensive risk management is a best practice and has to be integral to the culture of one’s firm. It’s not one person’s responsibility; it is everyone’s responsibility to be focused on risk management. You need to hire people who are not just going through the motions, but challenging their findings because not every transaction looks and smells the same way, and not every trade acts the same way, and not every security acts the same way. The first premise of risk management today, and five years ago, and five years from now, is a culture where everyone is aware that risk management is integral to their job, with the tone being set by senior management. Then you need a culture where people are comfortable coming forward and acknowledging the existing and potential risks that need to be mitigated in an organization. Left to fester, something will happen whose outcome you may not like or be able to properly control.

GIT: Are there new technologies or innovations you or your IT colleagues are keeping an eye on?

JB: According to our Chief Information Officer, probably the biggest one going on right now is virtualization technology, which would let you run multiple applications from the same server. In many cases now, when you have one thing running on a server, if you want to run another thing, you have to purchase another server. Virtualization will let us run several virtual servers on one piece of hardware. That has a dramatic impact in the cost of the hardware component you manage, as well as our need to deliver a new server. If you can create it in software, you can do it almost instantaneously. It’s more subject to an approval process, where if you have to go through a budget process, procurement process, installation process and so on, that’s normally a period of some weeks. That will be a pretty important change in the industry.



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