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All the Alphas Searching for Success in Active Asset Manager Afflictions

Active Investment managers suffer several afflictions. First, the quest for above- market returns (called investment alpha) is both expensive and intense. Searching for information inefficiencies to turn into alpha requires expensive fundamental- research teams spread across the globe. Broader access to professional-grade investment tools has made finding real investment alpha even more arduous.

Second, when active managers fail to generate investment alpha, or only achieve market returns (beta), then, clients take their assets away. And that’s what has happened over the past few years. Assets have migrated from active investment management to lower-cost passive approaches, such as index and exchange- traded funds. For example, in 2018, passively managed equity funds hauled in $472bn, while actively managed funds ones shed $488bn, according to EPFR. Fewer assets lead to falling fees and reducing revenue.

Third, fees paid for active investment services continue to fall. According to Morningstar, U.S. open-end mutual funds and exchange-traded funds saw a 6% fee decline in 2018. This was the second-largest annual decline recorded by Morningstar since they began tracking U.S. fund fees in 2000. With index equity funds charging fees of eight basis points on average, while active managers charge an average of 78 basis points, the pressure on fees will continue. Active investment managers have treated their afflictions with cost cuts and acquisitions. Examples include Legg Mason’s recent 12% staff reduction and ’s acquisition of Oppenheimer Funds. Trillion-Dollar Thinking These afflictions turn acute for active investment managers with around USD 1 trillion. In the U.S., this affects asset managers such as Affiliated Managers, Capital Group, Franklin Templeton, Invesco, Legg Mason, and T. Rowe Price. In Europe, this affects asset managers not directly affiliated to banks, such as , GAM, , Schroders, and . Unlike the Blackrock and Vanguard behemoths, these businesses can’t use their scale to operate on thin margins. This means rethinking how to compete.

Read on to learn how one of Sinequa’s customers, the fifth-largest global manager of cross-border funds, is implementingAll the Alphas to change how they compete. All The Alphas

Designed to find and exploit informational inefficiencies, the active investment management industry has over-focused on the most transient of the alphas -- investment alpha.

This means overlooking the value hidden inside other internal functions, such as distribution and service. Delivering exceptional performance (alpha) in these functions can create competitive advantages more durable than investment alpha.

Distribution Service Transformation Investment Mergers New Research & Acquisitions Product

ENTERPRISE SEARCH

Data underpins all these alphas. Typically, it’s the least optimized resource in most firms. Yet, accessing and understanding all this data remains a heavy challenge. Many asset managers have been pieced together via acquisition resulting in a jumble of legacy brands, functions, and system silos. Your employees strain to generate a unified view across this data sprawl.

Sinequa’s intelligent search platform helps our investment manager customer to: • Turn their flood of data into information and insights tailored to each role. • Reduce the risks of digital transformation projects. • Provide distribution and service employees with a unified view of clients and products.

Distribution Alpha Gathering assets drives revenue for investment managers. As asset managers evolved from transactional product models to relationship-driven distribution, they invested millions in people and systems, especially CRM. These investments have produced modest returns -- usually creating no distribution alpha.

The investment management industry added 50% more new sales and marketing employees between 2012 and 2017. Yet during this time, sales professionals generated only half as much revenue per employee, according to Casey Quirk in their 2019 report, Systemic Sources of Distribution Inefficiency. Unsurprisingly, about 76% of distribution leaders said sales productivity is their top issue.

The same report found significant distribution inefficiencies, including: • No single view of a client because client data sprawls across multiple systems. Only 13% of asset managers have reached their target state for CRM. • Tool fragmentation across sales, service, and marketing caused by siloed organizations buying separate applications, which fractures the client experience. Only 18% of asset managers reported having technology functions that adequately support distribution. • Data-to-insight blockages with only 17% of asset managers surveyed saying they were enhancing distribution with data and analytics.

Our customer uses the Sinequa platform to simplify and unify distribution for their international sales across 34 countries.

Service Alpha Active investment managers justify higher fees when they deliver higher returns.

But premium expectations apply to more than investment performance. Client service requires the same. If clients don’t receive an exceptional experience (service alpha), they will join the great migration to passive investment managers.

Service alpha centers on offering clients personalized conversations that improve their financial wellbeing. For 90% of wealthy investors, developing a goals-based financial plan is more important than the actual advice or investment management (CFA Institute study, 2016). Let me get back to you

With investor clients in 170 countries, our asset manager customer had some service ailments.

Typical comments included: “If somebody is asking a question, we shouldn’t be answering: let me research this and get back to you in a couple of days.”

IT Project Manager

Too often, the response to client queries was to defer an answer, ask for client forgiveness, and forage for the answer as quickly as the systems allowed. With more than 15,000 fund fact sheets produced every month, finding the information needed could take hours or even days.

More difficult questions needed expert help, but finding the right expert could take up to four or five business days. The service was at- or below-market standards for client care. “Every time I want to get a fact sheet, I have to drill down through seven layers of a SharePoint structure…This is insane…People are wasting an hour a day… we’re wasting a lot of money.”

VP, Marketing This lack of service alpha had the following effects:

• Diluted brand value.

• Damaged customer experience.

• Wasted employee time.

• Raised regulatory risks.

Our customer commissioned a consulting firm to review customer-service processes and performance. Their report confirmed these effects and created a catalyst for the Sinequa solution.

Investing in the Sinequa platform helped our active investment management customer to: • Enhance the experience for both retail and institutional clients. • Save employee time with an estimated value of $4.6 million per year. • Reduce the need for hiring customer service staff with an estimated value of $16.8 million per year. • Enhance brand reputation.

Transformation Alpha Challenger investTechs and WealthTechs shouldn’t stand a chance. Incumbent investment managers and wealth advisors have thousands or even millions of customer relationships, decades of experience searching for investment alpha, and petabytes of data. Yet incumbent institutions struggle to adapt to rising customer expectations quickly enough. All this has encouraged well-funded fintech challengers to pose severe competitive threats.

Incumbents struggle with rapid change because of legacy systems, organizational silos, and data volumes that exceed human capacity to analyze them.

In pursuit of disruptive innovations, investment managers and wealth advisors have embarked on digital transformation programs and big data projects. Unfortunately, 70% of digital transformations fail, according to McKinsey. And 60% of big data projects fail, according to Gartner. These projects are investments with high risks and mostly uncertain returns.

With Sinequa’s AI-Powered Search, our investment manager customer can: • Leverage legacy systems and understand data across systems and silos. • Turn inhuman amounts of data into information for human decision-makers. • Reduce the cognitive burden on employees so they can use their unique skills. • Increase revenue and productivity while reducing risk. • Scale solutions with natural language processing and machine learning.

Investment Alpha Active managers search for informational inefficiencies the market doesn’t see or yet understand and trades on them. But this investment alpha is transitory. It works until the market figures out the inefficiencies and competes them away. For active managers to outperform, they must pursue an endless quest to find new information inefficiencies. Otherwise, they will return to the mean market performance, but after deducting expenses and fees, they’re underperforming. The result: even more client assets migrate to passive approaches.

Data represents a challenge, but also an opportunity for investment analysts - if they can turn that data into information. The variety and volume of data can overwhelm investment analysts.

But Sinequa’s ability to perform natural language processing (NLP) at scale can help. Imagine understanding and analyzing vast amounts of text, in multiple languages, from a variety of sources, without having to read it all. Sinequa can extract terms and topics, summarizing a large body of text into themes for rapid understanding by humans, and systematic analysis for statistical and machine learning applications.

Data, especially alternative data, can provide investors with insight into alpha- generating market inefficiencies ahead of the market. Historically, analysts looked at financial statements, interviewed executives, and compared similar companies in the industry.

To stay ahead, investment analysts must search across unstructured data and develop an investment edge across many varied datasets. Although data remains the foundation of all investing, the research and portfolio construction processes still require human judgment.

Our asset manager customer has 42 research offices spread across the globe. With Sinequa, they can take advantage of more information from a broader range of sources. This means they can find and exploit investment alpha at scale like never before.

M&A Alpha Asset managers are responding to their afflictions by merging and acquiring each other. Asset management deal-making hit a record in 2018, with 253 transactions announced. The total value of deals rose 29% to $27.1 billion compared to 2017, according to research compiled by Sandler O’Neill & Partners LLP.

This is a worldwide phenomenon. In Europe, Deutsche Bank’s DWS Group has been exploring tie-ups with other asset managers to gain scale. Swiss money manager GAM Holding has tried to sell itself. In the U.S., Invesco took a $5.7 billion bet on the future of with its acquisition of Oppenheimer from Massachusetts Mutual Life Insurance Co.

Execution risk is high in asset management deals both in pre-deal due diligence and post-deal integration. Without fast, efficient, and effective execution, the principal source of competitive advantage for an active investment firm – its talent – may leave.

Sinequa helps with due diligence by analyzing and bringing together structured and unstructured information, including client contracts and employment agreements. Then, post-merger, Sinequa provides a single, secure, unified view across disparate data siloes using pre-built connectors for all major enterprise technologies.

New Product Alpha Most new products fail. Investment products are no different. According to Casey Quick’s New Arrows for the Quiver report, asset managers need to improve their new product development dramatically. Half of all new investment strategies attract less than $200 million in assets -- even after 10 years of distribution. Asset managers around a trillion can’t afford the business risk of making bad new product bets, which means fewer product launches and little tolerance for post- launch errors. Start Your Search For Success Enterprise Search Achieving All the Alphas usually starts with deploying Sinequa’s enterprise search platform.

Enterprise search software indexes and understands content from almost any source of information. Unlike web search, which only scrapes publicly-available information on the web, enterprise search finds all the content inside your company. This data can be structured (CRM, such as Salesforce) and unstructured (such as email and PDFs). All this, while maintaining your corporate access controls and provisioning policies to keep data secure.

Sinequa evolves enterprise search further. Coupling two decades of research in natural language processing with the latest deep learning approaches means your users get immediate, relevant, auto-improving answers to their questions. Users have a complete view of customers or products or risks or contracts or deals all within a single view, created instantly from the most up-to-date content.

Sinequa’s AI-Powered Search and Analytics platform saves your employees time, so they can concentrate their skills on creating All the Alphas.

Contact us to start your search for success. Paris New York San Francisco Frankfurt 12, rue d’Athènes 245 Fifth Avenue 595 Pacific Ave 4th Floor 20 Fitzroy Square Walter-Kolb-Str. 9-11 75009 Paris New York 10016 San Francisco, CA 94133 London W1T 6EJ 60594 Frankfurt/Main

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