Research & Development: The unsung hero of Investment Funds
Kanika Mishra Pathak · Posted on: September 11th 2024 · read
Kanika Mishra Pathak, Research & Development Tax Director at MHA discusses the importance of Research & Development (R&D) for investment funds and why IT investments are becoming critical for future success.
Investment funds, traditionally seen as bastions of financial acumen and market strategy, are increasingly turning to R&D, especially in IT/software development and mathematics/statistical analysis, to maintain their competitive edge. This technological evolution is not just transforming individual firms but also shaping the wider investment management landscape, including critical and ubiquitous sectors like pensions, savings, and insurance.
R&D in the investment world: Beyond numbers and charts
R&D in investment funds is found in several areas including:
- Trading platforms This encompasses the development of sophisticated trading platforms that enable fund managers to execute trades swiftly and efficiently. These platforms are constantly being refined to enhance functionality, incorporate advanced analytics, and ensure seamless integration with various market data sources.
- Infrastructure and DevOps Due to their specific needs particularly in terms of scale and performance, traditional infrastructure management approaches are often insufficient for investment funds – this has led to advancements in infrastructure management and development operations to allow companies to build fast and deploy faster.
- Consumer-facing models Investment firms are increasingly focusing on R&D to develop user-friendly, self-service platforms that empower individual investors to manage their portfolios. This includes features like personalised investment recommendations, portfolio analysis tools, and educational resources.
- Disruptive Technology Whilst customer acquisition processes such as Know-your-customer (KYC) checks and quotation/pricing were traditionally manual and time consuming, disruptive technology has emerged that enables video based and programmatic KYC/onboarding. This has significantly reduced speed of customer acquisition whilst improving on costs involved.
- Quantitative modelling Investment fund managers are often involved in developing new models for managing risk, portfolio optimisation and volatility. Traditionally, R&D associated in these areas centred around development of new algorithms and libraries that required extensions to the underlying technologies themselves (e.g. MATLAB and R). With recent legislative changes, mathematical and statistical advances are allowable for R&D for tax purposes – this greatly enhances the scope of R&D incentives available to companies in the funds space.
The wider impact: Beyond Investment Funds
The investment management industry's investment in R&D has a ripple effect that extends far beyond its own domain:
- Pensions and savings: Advanced investment management tools and strategies enable pension funds to optimise their investment portfolios, ensuring long-term financial security for retirees.
- Insurance: Insurance companies rely on investment income to support their underwriting activities. Effective investment management practices, fuelled by R&D, help insurance firms maintain financial stability and offer competitive, dynamic pricing and quotations.
The UK funds landscape: Challenges and opportunities
The UK boasts a vibrant and diverse funds landscape, with a wide range of investment funds catering to different investor needs. However, the industry faces certain challenges:
- Regulatory complexity: The UK's regulatory framework for investment funds is complex and constantly evolving, requiring firms to invest in compliance expertise and technology.
- Cost pressures: The rise of passive investing and the growing popularity of low-cost exchange-traded funds (ETFs) are putting pressure on traditional active fund managers to reduce fees.
- Technological disruption: The rapid pace of technological change is disrupting traditional investment models, requiring firms to adapt quickly or risk being left behind.
Technological advancements, such as the use of artificial intelligence (AI) and big data analytics, are creating new opportunities for investment firms to enhance their offerings and improve their performance.
Despite these challenges, the outlook for the UK funds industry remains positive. The demand for investment products is likely to remain strong, fuelled by demographic trends and growing wealth accumulation.
Technology at the forefront: System architectures and open source
The business of managing and making money demands continuous investment in R&D. This investment extends from advanced trading platforms used by fund managers to innovative self-service consumer models.
New system architectures are being designed to meet the demands of low-latency and high-throughput trading. This requires a shift towards distributed systems and real-time data processing.
Open-source technologies like big data analytics are also playing an increasingly important role. By leveraging these technologies, investment firms can gain valuable insights from vast amounts of market data, enabling them to make more informed investment decisions.
Conclusion
R&D is the silent engine driving the investment management industry forward. It empowers firms to navigate the complex financial landscape, meet investor needs, and create value for the broader economy. As the industry continues to evolve, the importance of R&D, especially in IT and software, will only grow further.
How can MHA help?
MHA, the UK member firm of the global Baker Tilly network, provides a wide range of services to support investment funds in their R&D efforts. They also have a deep understanding of the fund management process that allows them to seek out opportunities to maximise tax relief.
Core services include:
- R&D Tax Relief: MHA can help firms identify eligible R&D activities and claim valuable tax credits. The MHA R&D team are specialists in supporting Financial Services and Fintechs maximise their claims whilst mitigating risk. With our scientific and technological backgrounds alongside industry experience, we bring a unique understanding of your business that allows us to streamline and adapt our methodology to your needs.
- Tax Advisory Services: MHA can assist with tax planning and strategy, tax preparation and filing, tax audits and disputes and a variety of other tax-related issues for corporates and individual private clients. Our goal is always the same; to provide our clients with peace of mind knowing that their tax affairs are in good hands.
- Regulatory Compliance: MHA can assist firms in navigating the complex regulatory landscape and ensuring compliance.
By partnering with MHA, investment funds can leverage their expertise to overcome challenges, capitalise on opportunities, and thrive in the dynamic UK funds industry.
