Collaboration is the future of investment

Over the last decade, most segments of the financial sector were subject to innovation, disruption or renewal of some sort, including banking, payments, money transfer, foreign exchange and trading. The investment sector too is facing an important transformation, following recent advances in technology and the growing power of social networks.

Collaboration is the future of investment

What if investors had better access to essential information of investment opportunities in lesser known regions and asset classes? What if they could reduce costs and save time spent on the investment selection process? What if investors realize that the information they are missing is in the hands of their peers, and vice-versa?

Institutional investors today rarely share information with each other. Collaboration was simply never thought of as a needed strategy, even though collaboration is such an organic element of human society. Let’s look at key perceived barriers to collaboration:

1. Fear of competition and avoiding sharing corporate “secrets”? Investing in the 21st century is rarely a zero-sum game. Imagine an investor from a family office in London, sharing tips on Brexit implications with an investor from a US Insurance company. Or an investment banker in Hong Kong shares his view about local equity funds with a German corporate treasurer. The vast majority of investors are not competitors, given the large diversity of institutional investor types (insurers, banks, pensions, endowments, family offices, corporate treasurers), investment strategies, as well as their geographic location. Further, collaboration could be compartmentalized, such that each investor can choose with whom to collaborate and which information to share. Thus they would still fully protect their institution’s interests by eliminating any competition risk, but let go of archaic corporate habits.

2. Collaboration in finance doesn’t make sense? There are over 100,000 institutional investors around the world. Think of the knowledge that each of them has, and the immensity of the combined knowledge of the investor community as a whole. Consider the waste and inefficiency that stems from the loss of information caused by the lack of collaboration among investors. Moreover, knowledge is a very unique resource as it’s inherently inexhaustible, regardless of how many investors are using it.

Collaboration would therefore mean easy access to free and relevant information, as well as an exchange of views and opinions with community experts, thus saving time during the investment process and drive significant cost reduction.

Avoiding the next financial crisis. Global collaboration among investors will also foster more balanced asset allocation, and would therefore result in better diversification of investments across more asset managers, reducing systemic risk. According to the recent IPE report[1], the top 10 asset managers manage $18.9 trillion of assets, nearly a quarter of the global size of managed assets[2]. This is an enormous concentration for an industry with thousands of managers globally (Europe alone has over 3300[3]). Indeed, the global financial crisis of 2008 revealed the magnitude of systemic risk, which led to a regulatory push to reduce sector concentration and increase investor reliance on in-house assessments.

What is needed for collaboration?

Of course, certain conditions must exist before such collaboration can prosper. Trust among investors and sharing common interests are key conditions for real collaboration[4]. Investors need also to fully grasp the benefits of collaboration, which would naturally require time to adopt, as well as some education initiatives. In addition, the technology and infrastructure used to foster collaboration must be secure, effective and ethical.

It’s time for investors to collaborate and harness the power of their community.

The transformation is underway.

Pulsar Connect is focusing its R&D on the #futureoffinance.

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[2] For the purpose of this calculation, we estimated that global managed assets are $80 trillion; BCG calculated the global managed assets in 2014 at $74 trillion.

[3] See EFAMA 2015 report, page 3

[4] See the research of Dr. Danyelle Guyatt on Effective Investor Collaboration

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