Toward the end of the Age of Sail, first-rate ships such as the British HMS Victory, French Valmy, and Ottoman Mahmudiye, carried more than 100 guns spread across 3 or 4 decks. Symbols of national power and prestige, these ships were designed for excelling at the line of battle, where two columns of opposing warships fired cannons along their broadsides. Several critical inventions over the prior 200 years, such as the train track and gunport, as well as advancements in mass production, made these floating fortresses possible.

Weighing in at more than 3,500 tons, with a complement of over 800 crew members, these ships required massive support systems to keep them afloat, both in peacetime and times of conflict. Timber for keels, beams, and masts were sourced from local forests such as Sherwood Forest and East Anglia, or shipped to the docks from the Americas, Danzig, or Hamburg. Specialized dry-docks were needed for their construction. Most importantly, a steady stream of well-trained shipwrights, carpenters, officers, and midshipmen to design, build, and sail them. And ships required constant maintenance—hulls were devastated by teredo navalis, a tropical shipworm brought back to the dockyards, and leaky ships had to be continuously treated with new oakum (caulking).

A navy’s edge was not found in daring captains but in the smooth operation of its myriad support systems—the Admiralty leadership, budgeting, logistics and supply chain management, personnel training, and maintenance.

Successful investment strategies are similarly dependent on a robust infrastructure. Outperformance is the accumulation of many small edges, so every component of the investment process is critical. Less glamorous tasks like hunting for errors in a data source or debugging an application (scraping barnacles off the hull) contribute to results.

Critical components include:

Investment Team

Modern investment management resides at the intersection of technology and traditional investment expertise; therefore, investment teams must possess both investment knowledge and technological prowess. Terabytes of global macroeconomic data, fundamental data, and pricing data must be sourced, organized, stored, and then turned into actionable insights.

Data Sourcing and Cleaning

Data sourcing is one of the most important decisions. Data feeds must not only be evaluated for accuracy but also for their dexterity and portability, powering internal applications run locally or in the cloud.

Strategy Development and Backtesting

Backtests are often proudly displayed on social media, proffering a magical mix of variables that produce stunning historical results. But these backtests are often done in a vacuum, with no regard to client needs, investment regulations, scalability, or marketability.  A strategy must start with client needs first.

Application Development

Data sources feed internal applications. Applications create investment insights, generate signals, and risk management dashboards.

Execution

Execution is the intersection of theory and reality. Position sizing, order relay, settlement, and custodianship are the less glamourous elements of investment management. There can even be large differences related to specific asset classes. For example, while global equities trade on exchanges, Canadian investment-grade bonds are typically purchased from a dealer’s inventory.

Every part of the supporting infrastructure must be continuously analyzed for areas of improvement. At the Battle of Ushant (1778), the HMS Victory suffered 11 killed and more than 20 wounded. This led naval tactician John Clerk to devise a new tactic of breaking the enemy line, one that Lord Nelson would use to win the Battle of Trafalgar 27 years later.

Today’s innovations power tomorrow’s performance.