The Client finished 2013 as the fifth-best selling mutual fund manager in the world with a reputation as a bond specialist, for strong skills in emerging markets, and as an advocate of active fund management. However, by 2016, even with $750bn total AUM, it realized that it had fallen behind the rival firms rapidly expanding their passive and ETF offerings. It needed to fast track an entry to the ETF market, especially smart-beta strategies. Its new ETF brand was going to be a major strategic priority for the firm.
Despite already having a well-developed IT system infrastructure, the staff hired to manage the new ETFs expected functions that were not provided. The PM system's ability to manage against an index, calculate accurate day-ahead basket compositions, and create optimized rebalances were all essential. Any solution also needed to fit well into the established architecture, and interface to several other systems, some internally developed.
The Client had a strong internal development team, resourced well enough to either build or buy the best IT systems to support its investment teams. A survey of possible off-the-shelf solutions came up with nothing that was ideally suited, making the option to build in-house look the most attractive. But how could the new technology be built in a timescale to match the ambitions of the business? And what was the probability of getting the software right first time?
Given the business ambition to launch many new ETFs through 2017 and beyond, the biggest constraint on an IT build was the time available. Building, from scratch, a team of developers with the necessary skills was something that senior managers were prepared to do given the importance of the objective. But it cannot be done by simply turning on a switch.
In the Client's search for providers of off-the-shelf solutions, they had evaluated Ryedale. The Ryedale Platform demos had gained high praise from their ETF portfolio managers, giving it the best functional match of all the products assessed. There were few functional gaps in the Ryedale product, and the reasons for not adopting it as a standard service were primarily non-functional. It was important for the Client to ultimately own every part of the ETF manufacturing process, including the IT platform's day-to-day operation and its further development.
The conversation turned to 'what else Ryedale could provide?' Could a package of consulting work — accompanied by the sharing of key pieces of source code — provide the Client with a way to jump-start their own platform?
A source-code license is an attractive option for companies wanting complete control over the integration and future development of an IT system. Provided a company has the in-house skills to take the development further, having the source code opens all the possibilities that in-house developed systems enjoy.
However, the cost of a source-code license necessitates thorough due diligence. A company considering it will have to answer these questions:
Answering those questions provided the framework for a two-phase proof of concept project. In the first phase, the Ryedale Platform was provided as a hosted service for the Client's portfolio managers to test. Selected funds and their indices were loaded into the test platform, and over three months, Ryedale tailored the software to ensure it met the Client's business requirements.
The second phase of the proof of concept examined the source code's technical attributes to be licensed. Ryedale shared details of the platform's architecture and design to allow the Client's IT architects to assess the quality of fit to their overall IT infrastructure. A limited amount of access to the source code was allowed at this stage, for example, in pair-programming sessions. Situation-specific issues, such as the interfacing to established systems for security master, OMS, compliance were investigated in depth.
After a successful conclusion to the proof of concept, a source-code licensing deal was agreed. With the code transferred to the Client's source code repository, Ryedale's role changed to providing support to the Client's development team as they took their priority requirements forward. This support came mainly in the form of explanations and occasionally issue resolution. The Client's development team quickly became self-sufficient regarding further development of the code, and the intensity of Ryedale's involvement dropped rapidly towards zero. This was understood as a measure of success by both parties.
The Client was able to implement a bespoke portfolio management system, highly suited to their ETF business's needs in a timeframe of just a few months. The collaboration with Ryedale and the source-code license gave the Client an acceleration of years versus an entirely go-it-alone approach.
Because the collaboration was able to start from a basis of working software, the proof of concept served to eliminate the risk of an IT-project false start. The Client's IT platform was able to meet the ambitious timeframes set by the business, being there to support the fund launches of 2017 and beyond. Today the Client has a thriving ETF franchise with over 40 ETFs heading toward an AUM of $10bn.