The symbiotic relationship between portfolio managers (PMs) and traders is a staple of the investment process with both sides making up key parts of the value chain, however as our capital markets continue to shift, demonstrably so too are these roles.
In an industry where change is widely inevitable, the relationship between the two appears to be irrevocably evolving.
Market structure changes, regulatory pressure, ever-increasing technological innovations, and data challenges are all key contributors to firms’ need to continually revise and reflect on their approaches.
Across the trading ecosystem, it is becoming clear that in order to be successful and achieve goals, an ever-more holistic approach is vital, including when it comes to the way in which traders and portfolio managers work together.
Speaking generally, head of trading for the London-based fixed income trading desk at RBC BlueBay Asset Management, Stuart Campbell, asserts: “Anywhere where the product is less homogenised, less commoditised, less liquid is the kind of space you would expect that the relationship needs to be quite tight between the PM and the trader.
“It comes down to how individuals are utilising the extra information. Who’s using that data, is it traders using it to help them form their portfolio managers’ portfolios or the other way around? It depends on how the shop is set up as to what, how, and who is using the data and what they’re doing with it.”
Office set-ups
In the past it may have been more common to see a clear distinction between a buy-side firms’ portfolio management teams and trading desks where the two groups were relatively segregated. However, current set ups indicate a change over recent times, wherein a coming together of the two sides has occurred on a tangible level.
Speaking to The TRADE, Tobias Stein, head of fixed income and trading at Quoniam Asset Management, confirms that currently his team’s set-up at Quoniam has PM’s and traders working in close quarters, constantly talking as the investment manager has them based in the same room.
He explains that though relationships between the two sides are different across asset classes, on the fixed income side, there is a very long history of collaborating closely together.
“Specifically, some 10 or 15 years ago there was a lot of portfolio managers actually trading by themselves but eventually the separation of roles made sense, but now the two sides are coming closer together as they work towards a common goal.
“[…] The increase in trading frequency of course will require more frequent interaction between traders and portfolio managers. This is where we see that shift back to a more centralised process – where previously they were further apart, now the two sides have come back to close quarters.”
Similarly, a source from Aviva Investors confirms that portfolio managers and traders at the firm also work in close proximity, with the knock-on effect of the Covid-19 pandemic working as a clear catalyst for increasingly hybrid and flexible set-ups.
“We all sit close together in one area, which is great for collaboration. Anyone could just walk over to someone’s desk and discuss something or ask some questions […] In addition, having a set number of days in the office where everyone comes together also definitely helps. A hybrid approach with room for close contact where possible.”
Read more: Pioneering a hybrid organisational structure
Moreover, RBC BlueBay Asset Management’s set-up also mirrors this approach. Campbell highlights that the firm has made a conscious decision to have traders and portfolio managers sat on the same part of the floor as part of its key strategy.
“We’re really looking to get more out of our traders, to have them think like a portfolio manager is how we’ve always been set up here. We’ve always said in order to get the most benefit out of the trading team, they have to be thinking like a portfolio manager. We’ve said that for many years now – they need to know what’s in the portfolio, they need to know what the targets are for the bonds that we might hold, are they getting close to the targets.
“In some instances, we’ve had our traders sat right beside the lead PM of the strategy and they worked in tandem.”
Demonstrably, the buy-side has been adjusting and recognising how PMs’ and traders’ increased interconnectedness can be leveraged to enhance execution.
Technology as a catalyst for change
Each buy-side firm has a different strategy and thus by definition has a distinct operational set-up, with unique focal points and ways of working. However, the common denominator amongst them when it comes to their approach is clear to see – the desire to ensure efficacy through increased electronic trading and data, while maintaining low costs.
When it comes to the potentially converging roles of portfolio managers and traders this is key. As innovations gain traction, lower value trades are becoming easier – and quicker – to execute. We are not yet in a place to consider a pie in the sky future where the trading desk is skipped altogether, however there are some interesting shifts happening.
Despite some real fear across those operating in the capital markets – there is understandable trepidation when it comes to what the integration of ever-more sophisticated systems could entail – the prevailing notion is that technology developments are tangibly allowing trading desks to spend more time on the less liquid and harder to trade elements.
Read more – The buy-side on AI: ‘The fear is real, but the rewards are there’
In the end, tech is a facilitator to the means of working changing, confirms Stein, who adds that the key to the process in fixed income is exactly the close collaboration between tech, trading and portfolio managers.
He highlights that in fixed income historically, PMs were also trading as well, specifically in the more illiquid segments of the market.
However, as he explains: “Alpha is the number one thing in terms of active strategies and execution, but tackling the liquidity challenges is the second biggest thing, and this is only addressed by each side collaborating.”
As well as internally making the most of what both teams have to offer, the ever-present outsourcing conversation is also relevant here, where firms continue to look for ways to allow their expert in house traders to make the most of their time and focus on only the highest value trades.
Recently, Groupama Asset Management entered a strategic partnership with Amundi Intermediation in which the firm combined its team of traders with Amundi’s offering in a bid to optimise its performance through improved access to a wider range of activity with increased negotiating power.
Notably, Amundi Intermediation’s international teams – which consist of over 60 staff – includes asset allocation services, specifically portfolio management.
Speaking in the May announcement, Eric Heleine, head of the buy-side trading desk at Groupama Asset Management, explained that the combination was precisely a direct result of ever-increasing technological developments across the industry: “With Amundi Intermediation, we share the conviction that execution is changing radically with rapid and global digitalisation.”
Read more: Fireside Friday with… Groupama Asset Management’s Eric Heleine
The roles PMs and traders play is directly affected by which direction technological updates are taking, but how far could this go?
Campbell highlights that from the perspective of RBC BlueBay AM, a so-called crossover between traditional and hedge fund, when it comes to the credit markets the increased amount of pre-trade data which is now available makes it “far more palatable” for a trader or portfolio manager to make the decision on how to handle flow.
He adds: “Nowadays, you react to live axes in the market and say ‘I want that’ and take it, rather than go and seek the bonds in the first place. Previously this was the role of the trader, but nowadays a portfolio manager can get such good live data coming in that it could be the role of the portfolio manager themselves.
“[…] in algorithmic pricing auto execution there is the ability to maybe allow very low value add trades that the trader spends time clicking, but really not generating much value from, to flow straight through.”
In this instance, a PM is theoretically creating an order which subsequently passes through established rules, enters the market and then returns without having even seen the trading desk.
Speaking to The TRADE in 2022, Christoph Hock, then head of trading at Union Investment highlighted that the asset manager was undergoing an evolution, becoming one unified multi-asset trading desk in a bid to execute a bigger percentage of orders sent by portfolio managers.
“Take a protocol like portfolio trading. That was just one way of trading equities five-to-10 years ago and now it’s widely accepted in fixed income […] that’s something you are missing when you do not holistically look at trading and assure that the individual asset class-based traders are talking to each other,” asserted Hock.
Notably, these methods are more likely to be the case for buy-side houses which opt for smaller teams, where the overlap of duties is already more prevalent.
Speaking to The TRADE, a source from Aviva Investors confirms that their own firm is a very traditional buy-side house where the PM’s and the traders have specific, distinct roles, and as such one “couldn’t really see in the near future a world where the PMs would access the market directly”.
“For the bigger institutions it’s very separated because there’s different responsibilities, and different skill sets.”
Wearing many hats
With the idea of individual skill sets in mind, many across the industry are of the opinion that while certain attributes, and indeed certain tasks, are exclusive to either PMs or traders, this does not necessarily mean that either side is not increasingly wearing different hats (be it by choice or necessity) or even that the tasks they do are not overlapping.
A buy-side source tells The TRADE that within their firm, “a lot of the PMs are now engaged in the analytics a lot more, which is great to see.”
They add: “That really helps because if they’re engaged in the analytics, they can use the data to adjust their strategies […] PMs are out and about a bit more now. They’re seeing more of their clients. As they’re out of the office a lot more the desk and people on the analytics side have taken on a bit more responsibility.”
The idea of using key data to adjust strategies is a key component of how many houses are looking to innovate, with various industry discussions having focused on exactly this over the last calendar year.
Many experts are adamant that a desk should be imbued with a data-driven approach, as long as there is the ability to interpret the information at hand – bridging the gap is important.
Clearly, firms are taking note. As Campbell highlights, “the new skill set coming about in recent years has been the ability to code or analyse data where historically it might have been about relationships […] it’s becoming important not to lose sight of the technological needs.”
On the other hand, Campbell adds that the people skills of the trader should not be sacrificed in the pursuit of this.
“The trader still needs to be on that relationship side, bringing liquidity because when it’s needed you’re hoping that they will pick the phone up to you and not the other two or three people that are also calling.
[…] When markets are volatile or there’s a major global event like Covid or Ukraine everything stops and you revert back to your old school relationship.”
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Indeed, it’s important to remember that the size of firms and their established focus is a very big factor in terms of how trading teams and portfolio managers interact, wherein being a jack of all trades could be both less attractive and less necessary.
“I get both sides of this argument, where people obviously think you should be specialised in your role and should just be focused on your responsibilities,” says a buy-side commentator, adding: “[…] In the smaller houses, you have to almost wear lots of different hats and be involved in different areas, whereas with the bigger houses it’s a bit more separated and people have their own responsibilities.”
Evidently, the ability to have a good view of the market, established relationship with the sell-side, a handle on key analytics – i.e. straddle the line – is becoming increasingly valuable, in particular where teams, and indeed firms, are of a smaller scale.
“A small shop with just a couple of portfolio managers may be operating in the hedge fund spaces and they may be doing their own trades, in which case they’re acting as a PM central trader anyway. In those instances, they’re probably happy to see a lot of the heavy lifting is getting done for them by the technology. If you go to a big trading team of 30 or 40 traders then you would want to leverage those folks,” asserts Campbell.
Looking at the overall picture, for portfolio managers it is more difficult to spread responsibilities too widely, and so an increased scope could be better suited to traders.
“From my perspective the end game would not be the roles being essentially the same. However, working together – the PMs and traders – on an end goal of increased systemic strategies is something that is in process,” concludes Stein.
Across the trading ecosystem, technology continues to be a catalyst for change when it comes to both the role of the trader and the portfolio manager – whether this be as regards their physical set ups or the increasingly varied responsibilities being integrated into their everyday duties.
While each role has concrete elements, key traits and features which – for the time being at least – appear immovable, the pursuit of the most effective, holistic, approach is demonstrably having a firm-wide effect on buy-side PM/trader relations.
As we move forward, achieving success is set to increasingly be a question of how these teams can work together, as opposed to merely alongside each other to ensure the most efficient value chain possible.