What is an innovation stack and how does it apply to portfolio management and the investment process? Broadly speaking, an innovation stack includes the systems, processes and analytics that span everything from research and ideation to post-trade reporting, writes Thomas Dadmun, CEO of Point Focal. While portfolio managers, traders and analysts are stack participants, its usefulness is positively correlated to its ability to help participants execute to improve performance, he explains in this article.
If the term “Portfolio Analytics Innovation Stack” makes you wonder what it defines, this content may be worth your time. If you manage the portfolio analytics innovation stack at a firm like Wellington or Two Sigma, this content is not for you.
I founded Point Focal on the belief that portfolio managers, traders and analysts are overwhelmed with information and desperate for insight. It is a belief based on working in data and analytics at State Street for a decade, and from having previously traded equities for a decade. My experience in these roles made me believe financial technology should be easier to use and more helpful.
The “innovation stack” term comes from the book The Innovation Stack, by Jim McKelvey who co-founded Square. As the book’s subtitle implies, Square was built one crazy idea at a time. The book made me consider that what we have been building at Point Focal is an innovation stack.
Broadly defined, the innovation stack applied to portfolio management includes the systems and processes that span everything from research and ideation to post-trade reporting. And it includes analytics across the stack. Portfolio managers, traders and analysts are stack participants. The stack’s usefulness is positively correlated to its ability to help participants execute functions that improve performance.
Our work in this space has convinced us that portfolio management technology solutions should evolve faster and add more value to its participants. While progress is being made connecting front-office-trading to back-office-operations systems and enabling interoperability across platforms, much of the underlying data and analytics are not evolving.
This is partly due to system design and process functions born without an analytics-first worldview: solving workflows and then analyzing results. This sequence is backwards and can lead to automating work that should never be done. We believe today’s PM stack should produce quantitative insight that informs workflows. Analytics first.
Well capitalized firms at the top of the asset management pyramid create their own portfolio analytics innovation stacks. They build internal proprietary technology that spans their own front-to-back functions and ensures their own application interoperability. Some of these firms turn their solutions into products and become vendors. But their sophisticated data and analytics operations and the specialized knowledge it produces are not productized. The innovation stack’s engine is not for sale.
Point Focal’s innovation stack consists of elastic architecture, alternative fintech data, natural language narratives, and visual analytics. It makes it simple to combine difficult-to-access, high-quality data with portfolios. Our Focus List product has narrow, but deeply analytical content across crowd-sourced earnings estimates, news sentiment and off-exchange activity. And it uses our innovation stack to communicate quantified insight.
Your innovation stack does not need to mirror ours, but it should exist. And it should be easy to use, helpful and flexible. Information by itself is not helpful. Insight is helpful. If your systems produce more information than insight, than they are not keeping you ahead of the analytics curve. When the retail trading phenomenon occurred last quarter, we adapted our stack to produce new analytics of portfolio exposure to highly concentrated retail stocks. Rigid platforms can result in watching GameStop news instead of analyzing portfolios.
An important insight from The Innovation Stack is that no single component of the stack creates its value. In fact, some components may be commoditized. It is the combination of components together that create uniqueness and value. Under each component is domain knowledge and capability interconnected across the full stack. Innovation stacks are difficult to replicate, which is why, despite their size and ambition, Amazon could not crush Square in the payments space by underpricing them. They could not replicate Square’s innovation stack.
In future articles I will be sharing more details of the components that make up Point Focal’s innovation stack. Some are used to publish the Equities LiquidityMatrix right here on TabbForum.
If our view of the portfolio analytics innovation stack has piqued your interest, it is probably worth considering the state of your own stack. If it drives growth, and changes with the market, fantastic. If not, applying the lessons of The Innovation Stack to your portfolio management process can impact growth, AUM, and performance.
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Thomas Dadmun is Founder and CEO of Point Focal. Previously he was Managing Director of Data Strategy at State Street Corporation where he led Business Analysis teams with responsibility for Data Visualization, Project Management, Client Relationship Management, Risk Management and System Implementations. Thomas has an equity trading background, before joining State Street he was Director of Trading at Firefly Capital and Vice President of Trading at Leerink Partners.