[Everything in financial services is evolving. Innovation in new tools and tech-driven approaches are challenging conventional thinking in asset management and offering new resources to traditional investment methodologies and processes. Especially as active managers as a group keep getting broad-brushed with a poor relative performance stigma, these established tech trends can potentially arm them with new battle plans to more consistently beat their benchmarks.
One area that seems to be increasingly making itself known is a new generation of sophisticated tools and models to analyze price trends. Adding well tested, intelligent trend analytics into the investment-decision process has been proposed as a complement to asset managers traditional research and fundamentally driven strategies. By adding another layer of intelligence and a dynamic market perspective, advanced analytics can enhance the investment process offering the potential for generating more alpha and risk management protections. Since such tools and innovative approaches tend to go where fundamentals do not tread, they may be able to capture important market dynamics around fundamentally sound investments. Importantly, this may reveal a strong rip current lurking dangerously underneath seemingly calm waters providing investment managers with the means to be able to look at the forest for context, not just at the tall strong trees.
That is why we went to new Institute member Rocco Pelligrinelli, CEO of Trendrating — a Swiss company providing advanced analytic solutions for active investment managers. We invited him to share his first-hand industry knowledge of these tools and his firm’s experience in enabling trend-capture in a simple, systematic and transparent way to add value consistently over time. This area may well be creating a new frontier for active management.]
Bill Hortz: You oppose what you call “simplistic rationales” used by many to argue against active managers relative performance in the active-passive debate. What do you think are the deeper issues and reasons to explore?
Rocco Pellegrinelli: The facts point to a consistent underperformance of mutual funds versus benchmarks as discussed in this article on a recent SPIVA (S&P Indices Versus Active) Scorecard report and the poor returns of value investing as highlighted in this article on a recent study by Fama and French, “Is Value Investing Dead?” However, the latter study also points out that the research data makes it hard to elicit clear conclusions on value investing because the data is so noisy and been too volatile month by month.
This leads us to the realization that stock price action today is impacted by stronger forces that have emerged: faster deployment of “big” money, more institutional money being allocated to equities (as bond yields are at historic lows), the impact of social media sentiment and the 24x7 global news cycle. Markets have been steadily becoming more complex.
If all these developments weakened the correlation between old-school fundamentals and price trends, then what counts is getting the trend right, irrespective of the reasons behind why it’s happening, which typically is discovered after the price move. It is interesting to see that in the competitive hedge fund industry the winners are the players using systematic models to capture trends and the discretionary traders are way behind in terms of performance.
For any large universe of securities, performance dispersion exists and it’s huge. Yet many fund managers don’t have the necessary tools and analytics to profit from it. We see that trend investing is the future in an increasingly faster pace world, driven more and more by technology processing massive amounts of data.
Hortz: What kind of opportunities does this newer perspective offer to help with active manager performance?
Pellegrinelli: Investors already rate, rank and measure fundamental and quantitative data. But they often lack a way to objectively assess the true direction and quality of medium-term price trends, despite the fact that trends are the key factor that impact investment performance for any style or philosophy.