Mat Gulley, Global Head of Trading, Franklin Templeton Investments, is changing how his firm embraces alpha, and is making the PM, research desk, and trader a more integrated unit.
I strongly believe in the alpha proposition offered by the truly engaged buy-side trading desk. With an increasingly complex current market structure, less intermediation in the execution process, new technologies, and the never-ending search for opportunities, now is the time for us to rethink and relearn buy-side trading and how it might best fit into the alpha generation cycle of research, portfolio management and implementation. The question, in my mind, is: “How do we leverage trading within the investment process in order to maximise returns?”
Along with revisiting the role of the trader, we must also continue to consider the importance of technology and how it drives structural change within the implementation process. Technology is no longer simply a source of operational efficiency; it is now an integral and valuable part of the entire investment process. Whether utilising internal applications to manage one’s proprietary data or using trade analytic systems to help manage execution strategies and create tactical investment opportunities, technology is vital to almost every aspect of the execution process. Furthermore, technology facilitates collaboration across the investment structure and helps frame our ideas on computer-based trading, algorithms, data analysis and performance. So, this is how I see the trading world: I view trading from a proactive tactical alpha standpoint with well-defined processes, procedures and risk management.
The ‘new’ structure
At Franklin Templeton, we have an experienced global network of over 50 traders on 13 desks in 10 countries who trade equities, fixed income, derivatives and currencies. We have set up these operations to specifically integrate with our research groups in order to integrate ourselves as closely as possible to the decision making process. The key themes for our desks are to integrate, collaborate and participate in the investment process. I believe that there remains unrecognised alpha that buy-side trading desks can add to the greater investment process. With an increasingly complex current market structure, less intermediation in the execution process, new technologies, and the never-ending search for alpha, now is the time for us to rethink and relearn buy-side trading and how it might best fit into the alpha generation cycle of research, portfolio management and implementation. The question, in my mind, is: “How do we leverage trading within the investment process in order to maximise returns?” We think about our investment process as a triangle having three areas of potential alpha creation, each with distinct time frames: long-term alpha, medium-term alpha and short-term alpha.
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We believe that the long-term alpha sits with the research analyst and, broadly-stated, might be in the one to five year range. This stage is where the fundamental research and catalysts for the investment are established. Then you have the medium-term alpha, which is roughly one month to one year, and that is where the asset allocator or portfolio manager (PM) gets involved. This person makes the decisions on what best combination of ideas to put into the portfolio. Then, we come to the short-term horizon, which is when the order is placed and up to one month. This is the implementation process. This is “trading”. The trader should optimise the implementation of the ideas and collaborate with the PM and analyst to make sure all information is understood and represented. The trader will also present new opportunities based upon market dynamics, volatility, liquidity, all the while understanding the PM’s strategic positioning and collaborating with all the various participants in the investment process. Asking this requires that our traders possess a unique set of skills: enhanced fun market knowledge, new technological tools and well-developed communication abilities.
So when we think about trading’s input into the alpha generation cycle, the trader is part of the “short-term alpha” or the tactical portfolio construction and implementation process. In my experience, this has historically not been the case. In fact, the traditional investment process has not recognised implementation within the alpha generation cycle; generally it was considered a cost mitigation center. As we evolve, the trader must participate at a much more dynamic and interactive level, and the PM and analyst must recognise this value proposition exists or has the potential to. As always, the PM sets the strategic portion of the portfolio according to the investment objectives and the PM’s views on the market or stock’s potential returns while the trader focuses on implementing those ideas using opportunity and impact as their guides, but also presenting the case for more tactical positioning around a core portfolio. Traders need to understand the investment process holistically and have some accountability and alignment with performance.
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The new “trader” should embrace participating in research and PM meetings to the extent that time allows. The new “trader” should want to be involved and understand strategy in order to help explore possible opportunities. If you have traders who have the skills to be anywhere along the investment continuum and they choose to be in trading, why not maximise their skill set on behalf of the clients and fund returns? I see this as leveraging people and doing so in an unconstrained manner.
With this model, you have an integrated and unconstrained trading desk that can assist in tactical decisions based on market movements, liquidity, portfolio manager needs and analyst directions.