Outsourcing of Financial Research

Over the years one of the prime concern of fund managers and other investors is the valuable time spent by the analysts on analysis. Studies have shown that a considerable amount of time was spent by the analysts in activities such as sourcing of financial information, preparing reports, populating the data required for financial research, tracking information related to mergers and acquisitions etc. Given the current mayhem at the stock markets and the need for detailed analysis of the situation has motivated the visionaries of many successful organizations to outsource a considerable amount of work to KPOs which specialize in financial research and analysis to improve their turn around time.



Services Provided by KPOs

The services of such KPOs include financial information aggregation investment research analysis, market intelligence, reporting and publishing support. The services of KPOs cover all approaches of investment decisions which encompass making an investment choice based on funds, equities, sectors, countries etc. Their clients include private equity and hedge funds, large investment banks, asset management companies, corporate finance groups, fund administrators and other financial institutions. This is achieved with a finesse as KPOs design, create and deliver customized solutions to Investment banks, Asset management companies, Private Equity groups, corporate finance groups and Large Institutional investors. One the key areas in which KPOs operate are the writing of annual reports which ease the process of mining the data present in the annual reports, and sourcing the information required for financial research. This is useful for studying and predicting the future of an organization but also giving key insights on the working of the whole sector.

Such KPOs not only help their clients create value by providing customized services which are backed by domain expertise and high-end analytical skills but they also work closely with their clients to deliver services that adapt to their evolving needs.

Sovereign wealth funds

Sovereign wealth funds are state-owned funds that are invested in different avenues across the globe. The money for such a fund is accumulated by the country or its central bank from sources like banking system, oil trading, foreign currency reserves, pension funds, precious metals etc. They are assets of the corresponding nation. They are generally invested with a long term horizon. Investment management entities are setup by the state to manage these funds.



Creation of Sovereign Wealth Funds

A sovereign fund is created when a nation has excess liquidity than is desired, which cannot be immediately consumed. This liquidity is maintained in the form of reserve currencies, precious metals, oil etc. These funds are used as a source of stability or a cushion against volatility in the international market for raw materials that are imported. By employing these funds, one can control the impact on the government expenditure due to the short term volatility of markets. During the recent credit crisis there were stories of some sovereign wealth funds making bad investments in Wall Street firms that have collapsed and needed cash infusion.

Concerns regarding Sovereign Wealth Funds:

There are certain concerns regarding these funds. Lack of transparency, no clear goal sometimes and their huge size which can have a great impact on asset markets. The total worth of most of these funds globally is now more than $3 trillion and growing at a fast pace. There are also security concerns due to these foreign investments as one of the potential motive might be to control certain strategically important industries of the country.

I came across a financial research article by S G Analytics, a KPO about these funds. The article argues that protectionist barriers are not the answer to security concerns arising from the nationality of the incoming investment. A more transparent and good regulatory environment is better suited to address these concerns.

BRIC: Emerging at a Fast Pace

Brazil, Russia, India and China (BRIC) have been some of the fast growing developing economics in the past few years. The name BRIC was first coined in 2003 by Jim O'Neill, the head of global economic research at Goldman Sachs. These four countries are also being referred to as the big four in the arena of emerging markets.

Of the BRIC Nations, according to this article, India and China have caught the fancy and faith of many investors as a result of which the investments to these countries have not stopped flowing. As a result of this the services of many KPOs specializing in the research of emerging markets, have been in great demand.

Lack of Liquidity: A major concern

The lack of liquidity is a major concern for investors investing in these emerging markets. There have been many instances where the lack of liquidity has caused the complete market to crash and stay low for a long time.

Another BRIC in the Wall:

Many articles, such as Emerging Markets: Another “BRIC” Hits The Wall, state a hazy picture for R and I of BRIC, however the prospects of China appear to be bright. In the case of India, as the author pointed out, the country has immense growth possibilities however the flight of success has its wings being chopped by the wrath of of corruption and incompetent governments.

Tourism Sector: Sector Research Perspective

The year of 2008 saw the oil prices soaring to new highs and touching about 150 USD per barrel (about 40% higher than the average price in 2007). Speculator spread rumors that it could also touch 200 USD per barrel. However by Feb 2009, it stabilized in the region of about 45 USD per barrel. One of the sectors that was worst hit by these fluctuating prices was the tourism industry.




Domino Effect:

The economic downturn is also expected to have a severe impact on the business travel which according to the World Tourism Organisation (UNWTO) accounts for about 15% of the passenger arrivals worldwide.

The tourism sector had borne the major brunt of the aftermath of 9/11 attacks which saw even some national flag carriers such as Sabena and Swissair collapsing. In India some of the major airlines such as Kingfisher and Jet-Airways allegedly defaulted on some of their payments and even entered a mutual agreement which raised the eyebrows of the regulators responsible for protecting consumers from monopolies.

Sector Research: Analysis of the Domino Effect

Financial analysts have spent sleepless nights trying to analyze the impact of such cascading effects where the performance of one sector can cause havoc on the results of another sector. Employees of KPOs have spent sleepless nights trying to evaluate the impact of such variations in prices and agreements between organizations on the financial health of the funds administered by them.

The current crisis has shown that sector research is a non trivial task as it involves the a detailed impact analysis of financial health of one sector on the financial health of the other. Such domino effects can have hair raising consequences if not analyzed correctly.

Information Aggregation: The need of the hour

“Prediction is very difficult, especially if it's about the future.” -- Neils Bohr.

Predicting the financial health is one of the primary activities of financial analysts and financial researchers. It is common knowledge that the outcome of any research activity depends on the data set on which the research is performed. Over the years leading KPOs such as S.G Analytics, have emphasized the importance information aggregation. In the financial research, the outcome depends on the details present in the data used and the organization of the data for mining.

Web as the source of data:

Lately the web is being highly relied upon as a source of the data. Regulatory bodies such as the SEC have ensured that this process is simplified by the introduction of the Electronic Data-Gathering, Analysis, and Retrieval (EDGAR) filing system. The EDGAR data is available for search at http://searchwww.sec.gov/EDGARFSClient/jsp/EDGAR_MainAccess.jsp.

Complexity in Mining Raw Data:

Most of the raw data is available in the internet, however past records of many companies are not present. Bloomberg, Reuters, and Associated Press (Google), are some of the key sources of past information however fund managers and financial researchers may require the annual reports of companies.

Role of KPOs:

Mining such data, aggregating it and presenting it for future source is some of the areas where KPOs have lately increasing their presence. The information aggregation services of the KPOs usually includes sourcing, validating, normalizing and presenting the information through a database that meets requirements of the financial analysts.

A critical requirement for information aggregation is the ability to maintain live and large databases at low costs. This art is currently being mastered by the KPOs.

Fund Administration

The lack of knowledge about the working of the stock markets and complex financial instruments involved has played a considerable role in the growth of collective investments schemes, commonly known as mutual funds.

Key players in a mutual fund:

The key players who are involved in the life cycle of a typical mutual fund include:

• A fund manager who manages the investment decisions, and
  
• A fund administrator who manages the other activities involved in running the mutual fund
  

Primary Activities of Fund Managers:

The primary activities with fund managers is seeking and ensuring a smooth addition of investors who wish to invest in a particular fund, and managing the flow of money.
Apart from overlooking the flow of money, many administrative tasks are involved in running such schemes. Some of the activities involved in fund administration are:

• Preparation of the accounts, in many cases annual accounts
• Daily accounting, recording and maintenance of all investment activities including multi currency accounts
• Corporate actions and cash reconciliations
• Calculations and reporting of NAV, dividend accruals, total expense ratio (TER), taxable income by jurisdiction, security lending income, book cap stocks, etc.
  

Outsourcing opportunities

Over the years the above activities which complement the management of the assets are being considered for outsourcing. Fund managers have been seeking the help of KPOs such as S.G Analytics to administer their funds.

Role of KPOs

This kind of outsourcing is important not only for the fund administration but also for fund analysis. Well kept records also ease the process of information aggregation. This is also useful for mining the past records for future analysis.

Knowledge Process Outsourcing

The World Bank Institute offers a formal definition of a knowledge economy as one that creates, disseminates, and uses knowledge to enhance its growth and development. Knowledge process outsourcing (KPO), though being in its nascent stages has started to compete with its much older sibling business process outsourcing (BPO). KPOs rely heavily on the use of knowledge technologies such as knowledge engineering and knowledge management to produce economic benefits.

Sectors in which KPOs operate

Some of the various sectors that are included in KPO are illustrated in the following figure.



There are a few KPOs that are operating from India, however only a few such as S.G Analytics work in the area of Financial Services and Market Research and Analytics. The research areas of such KPOs include (but is not limited to)

• Equity research
• Sector research
• Thematic research
• Fund analysis
• M&A support
• Investor proposals
  

Challenges faced by the KPO industry:

In spite of the current economic slowdown, the market of the above research areas is expected to grow to about $10 billion by 2014. This eye-opener was first brought to public notice in the following blog post . The presentation gives an idea of recruitment challenges of the KPOs. I am glad that one of the key players in this industry has made this available

Pune as the most suitable destination for a KPO in India:

An article in rediff.com , gives some of the few reasons why India offers the highest potential for Knowledge Process Outsourcing (KPO).

• India enjoys unique advantages in having a large pool of English-speaking professionals.
  
• The Indian Diaspora are a rich source of domain expertise and can be motivated to help transfer knowledge and expertise to India and nurture a new generation of India-based thought leaders.
• The entrepreneurial and energetic business community in India has the capacity to step up to this challenge.
  

The above facts have been supported by the former president of India, Dr. A P J Abdul Kalam, in his book titled India 2020: A Vision for the New Millennium.

As pointed out by S G Analytics, the advantages of being a KPO in Pune include:

• Access to fresh talent: Termed as Oxford of the East more than 70 educational institutions (colleges and universities), 50,000 students and 3,000 MBAs graduating each year!
  
• Access to experienced and senior talent - Industrial zone with more than 30 large companies (>2000 staff) and more than 2000 SMEs. Outsourcing hub of India (IT services companies, BPO's KPO's)
  
• Access to sector research and language capabilities - Research institutions such as NCL (National Chemical Laboratory), NIV (National Institute of Virology), IUCAA (Indian equivalent of CERN) and C-DAC (Centre for development of advanced computing).
  
• Language capabilities - More than 200 certified German, 70 certified French and 50 certified Japanese translators graduating each year.