This month, Money Fund Intelligence interviews James Morris, a Vice President at Investortools, an Illinois-based company that produces portfolio management and compliance software. We talk about their history and software products, recent regulatory changes, and cash separate accounts. Our interview follows. (Note: This interview is reprinted from the May issue of our flagship Money Fund Intelligence newsletter; contact us at inquiry@cranedata.com to request the full issue.)
MFI: Tell us about your beginnings. Morris: Investortools goes all the way back to 1983 ... back to the early days. We started out focusing on tax exempt mutual funds, and have grown our product suite from our initial product, which is called 'Perform.' We now offer of a handful of products that all can be integrated into one common software suite, or used on a standalone basis. Our presence in the money fund space started around the middle 1990s.
I have been with the company for over 17 years now, and our presence in the money fund space predates that. Our money fund product is called 'Smart,' which stands for Short Maturity Analytic Reporting Tool. We have seen some pretty substantive growth in this space, as the fixed income market has evolved over the past couple of decades. About half of our business relates to separate accounts or SMAs. I use the term broadly -- I'm talking about institutional SMA, private clients, high net worth, family office, and retail separate accounts.
MFI: Tell us more about the products. Morris: If you are in the short maturity space, Smart is the focal point of our products. So that means it incorporates all of our 2a-7 compliance and stress testing with reports and graphs oriented to short maturity. It also is designed to integrate into that suite I mentioned, so you can have Perform for your long portfolios, and Smart for the short and ultrashort portfolios, all integrated with CreditScope, which provides the credit team instant answers to how much credit exposure they have.
Users can also quickly see when an obligor was last reviewed and the latest analyst opinion. On the portfolio management side of the business, Smart is designed to make it easy to manage your diversification, run your 2a-7 risk limiting conditions testing, your stress testing, etc. Additionally, [we're] delivering a layer of compliance relating to any idiosyncratic constraints that apply.
We all know 2a-7 is very well-defined. A lot of firms, in addition to 2a-7, have different constraints that they put upon their portfolios, and part of that is an attempt to stand out and find their niche. Then, other firms have specific things that they never will invest in or have other constraints or limits to put on the portfolio. What we at Investortools call 'portfolio rules' and 'management styles' allow you to put those user-specified limits on portfolios and test them pre-trade, then ad hoc, and demonstrate that you are in compliance at all times.
When we see 2a-7 compliance regulations change, that's an opportunity for us. Clients look to us and ask, "What can you do to help?" [In recent years] with fee-waivers in place, there's been little appetite for firms to go out and spend money. For us, this is definitely an opportunity to help people solve problems. Leveraging software takes care of the complexities of the business, so that portfolio managers, traders, and credit analysts can focus on core things. That is where we add value, by helping people scale their business.
MFI: What are your big priorities now? Morris: Smart and Perform are products that focus on the portfolio management aspects of the business, but Creditscope is designed to pair with those to serve credit analysts. Credit analysts use our municipal edition of Creditscope to receive fundamental data -- agency ratings, financials, pension data, all kinds of stuff that that is collected and spread by Merritt Research Services. A note about that: CreditScope on the muni side is a joint venture for us. Merritt Research collects and provides the data. We publish it, design all the software, and then it gets delivered.... Analysts use that tool to ultimately determine and publish their opinions. We have a nice streamlined credit opinion and surveillance workflow built in the system.
The portfolio managers can click through and see what the latest write-up on this credit is and when it was last reviewed. We bring those two groups together in one common software suite. There's been a lot of interest in building out more streamlined 'approved' process..... There is a lot to keep track of there. Certain shops on the on the taxable side would approve maybe an obligor and/or a program, and maybe certain enhancers. On the tax-exempt side of the business, they spend a lot more time looking down to the individual security structure.... There is a lot for folks to keep a handle on.
MFI: What are the challenges for PMs? Morris: Back in the early 2a-7 days, the focus was knowing your diversification constraints and operating within those constraints. But there was a real sense of wanting to maximize yields -- yield seemed to be a bigger part of the conversation.... Today, we don't talk about it as much, partly because yields have been so low. Even with rates starting to tick up, there is not the same sense of priority behind being the top yielding fund in the category.
There is more of a focus on having to deal with the new aspects of compliance. It seems like there is almost an open dialogue between the portfolio manager, their board, and to some extent regulators.... In today's money fund space, there is a lot of effort spent getting to know your client. PMs now also have stress testing discussions that they must have with the board once a month. The depth of knowledge and awareness is a lot more expansive now than it used to be.... It's a lot more stressful to be a portfolio manager now than 20 years ago.
MFI: Were the 2016 reforms a big deal? Morris: Yes, the changes were a big deal for us and for our clients..... It was the last straw when it came to triggering some industry consolidation.... We have some of the larger players [as clients], but our presence was stronger with the smaller to mid-sized players. The largest firms tend to have their own 'in-house' systems in place.... Anyway, we saw consolidation and that hurt us to some extent.
But the 2016 reforms also presented us opportunities, because we were able to rework our compliance system to make it very robust. We can test limits as proposed trades are entered, demonstrate how the portfolios are affected and combine that with all the other trades that you have in your blotter. We don't require a long-term contract, and offer the flexibility of month to month. As a result, we keep close to our clients in order to make sure that we are adding value.... We have a lot of dialogue with our clients and they often recommend enhancements. Often, these enhancements are broad and benefit all of our clients, but for requests that are truly client specific we will customize the system.
As technology advances, there is definitely a larger percentage of trades that happen every year that are either electronic or being facilitated in a major way by an electronic platform. We are making strides towards streamlining electronic trading and I believe that the market is getting to the point where the decision to 'go electronic' is less about requiring new technology and more closely related to management being open to the idea.
