"Nobody's going to get all the data perfect," notes Tom Fortin, chief information officer at BlackRock, now the world's largest asset manager.
Beyond that, getting reliable information on some forms of debt and other financial instruments still needs to be pieced together with data from multiple sources "to find the best components of a certain security's attributes," he maintains.
But BlackRock has made a practice over the last two decades in getting the data right-and making it a clear competitive advantage that lets it grow, worldwide. Getting the data right and creating the right model for each new financial instrument that comes along is what BlackRock has made a foundation of its integrated system for analyzing investment strategies and executing the trades it needs to produce results.
That "magical" system, known as Aladdin, is not just used by BlackRock, in its fixed-income and other investment operations. It's a commercial product that is one of the behind-the-scenes reasons BlackRock is able to effectively expand its presence internationally.
In 2001, for instance, BlackRock made its first installation of Aladdin for a customer that also manages assets: Barclays Global Investors. Eight years later, BlackRock bought Barclays for $15.2 billion in cash and stock. This was the move that earned it the ability to call itself the world's largest asset supervisor, now with $3.6 trillion under management.
In March, BlackRock said it planned to expand its operations in Japan and Asia, in a partnership with Mizuho Financial Group. Mizuho, which includes Mizuho Bank, Mizuho Corporate Bank, Mizuho Trust & Banking and two securities firms, has $1.4 trillion under its management.
As part of the alliance, Mizuho said it is considering adopting Aladdin, as its own investment management system.
BlackRock was founded in 1988, on the basis that "the sell side was selling products that the buy side did not understand how to value," Fortin said. So BlackRock set out to figure out how to value complex financial instruments, also often called structured products. And it did so long before a crisis involving some forms of these instruments nearly caused a global fiscal breakdown.
The first product that BlackRock sought to understand was a set of instruments that came to be known as collateralized mortgage obligations. These are bonds sold by a firm that is the legal owner of a set of mortgages and buyers receive payments according to a defined set of rules. The mortgages that underlie the payments are the collateral.
Two of the original founders of BlackRock, Benett W. Golub and Charles Hallac, began building the first models that would allow the firm to accurately value the instruments-and invest in them on behalf of clients.
"But models alone are not valuable unless the underlying data is accurate," Fortin said. If you don't know what the history of payment is on the mortgages that are your collateral, then you have no idea what the CMO is actually worth, in essence.
So, Golub, now the chief risk officer of the firm, and Hallac, now its chief operating officer, began building out a portfolio management system, to capture trades, to price the instruments, and to capture reference data and other master information about each product the company might invest in.
The analytics and the portfolio management system they developed became the core of what is Aladdin. And getting the data right became a never-ending process. Because information from so many vendors had to be pulled in, reviewed, checked and rechecked.
Every day, or actually overnight, all data on for every security that BlackRock is trading in for every portfolio is checked by a 300-person quality control desk in India.
The desk checks movements in prices, expected outcomes and identifies missing or inaccurate data. These get put on exception monitors, for correction before the information hits a portfolio manager's desktop computer the next morning.
"This is a very different approach [than] believing that all the data coming into the computer is correct," Fortin said.
Missing prices are found and verified. Changes in bond durations are resolved. Each piece of data used to identify risks in an instrument can get reviewed and remediated, as needed.
The attention means that the details entered about a trade by a portfolio manager remains the same on any screen anywhere in the company. Operations managers can confirm it, safely. Financial managers can use it to reconcile the cash flows that are being used by analytical models. Then, those models can turn out reports that identify any risks of a bond, so that the next morning, the portfolio manager can see how the overall risk in a portfolio has changed. And start to go about the next day's moves.
To get the right data, BlackRock has deep relationships with some of the largest reference data and pricing vendors in the world. Aladdin is hooked into dozens, if not hundreds, of data streams, from vendors, Fortin said. And BlackRock works with suppliers to help identify weaknesses in their services and get the data as perfect as possible. In structured products, like CMOs, you have to get detailed sets of data for the underlying collateral. To see, for instance, rates of delinquency or prepayment of mortgages.
Among its data "vendors": federal agencies such as Federal Home Loan Mortgage Corporation and Federal National Mortgage Association, which have supplied feeds of loan payment information.
BlackRock pulls in reference data on all forms of financial instruments, from fixed-income products to stocks to derivatives to futures, options and floating rate instruments.
Aladdin, in effect, captures data on "virtually everything that's moving in the financial markets," Fortin said.
Refining the models that use the data never stops. BlackRock develops a history on every factor that matters, then uses a continual feedback loop to rest and refine the models.
Every day, for instance, it projects what the prepayment forecast on mortgages for the coming month and then, when the numbers come in from the loan agencies, it reviews how close its forecast was, revises its model for the next go-round and does the same for other factors affecting its investments, such as home price appreciation. Aladdin does not, in the end, tell a trader or portfolio manager what to do. The system may indicate to the manager or trader if a market is getting out of control.
But, "it's up to the individual portfolio managers and traders to evaluate those signals and the overall context of the portfolio, and take appropriate action," Fortin said.