Hortz: Can you explain further how your firm designed your advanced price trend analytic tool to help active managers?
Pellegrinelli: Our team has 25 years of experience building equity models, and after many years of research and development, we designed a way to rate price trends. We provide a rating for trends with a time horizon of 6-to-18 months. These trends tend to make a measurable difference in the yearly performance important to active managers. The model captures the beginning of bull and bear trends on individual stocks with a reasonable accuracy. A and B ratings confirm bull trends while C and D rating identify bear trends.
Our mission is to provide a well validated, robust metric to qualify the true direction and quality of price trends. We do not forecast how long and how far a trend can go. We do not believe in forecasting. What we provide is a clear rating that reflects the strength and quality of existing price trends. Our data provides discipline and objectivity as a solid sanity check across the holdings of any portfolio.
To make this easy and actionable, we introduced a critical, innovative metric to evaluate the overall trend exposure of portfolios. In addition to rating the individual holdings, we can then calculate the aggregated, weighted rating of the entire portfolio. It’s called the Trend Capture Rating (TCR).
Hortz: Can you give an example of how fund managers can use your TCR tool to beat their benchmark?
Pellegrinelli: TCR measures how your portfolio is positioned in terms of rising stocks vs. falling securities. For example, if the portfolio TCR is B- while the benchmark TCR is B+, you need to examine the underlying holdings to find out why. If my portfolio is holding 30% or greater of C and D rated stocks, while the benchmark contains only 15%, then the probability for the active portfolio to beat the benchmark is little to none. By raising the TCR of the portfolio to B+ or higher the chances to outperform substantially increase.
Improving the portfolio rating is easy. The manager can just reduce the exposure to C and D rated stocks by reallocating more to other stocks in the same universe that fit with a positive rating (A or B). Adding TCR analysis can remarkably improve the performance of fundamental-driven investment strategies, combining good fundamentals with proven price action predictive analytics.
Hortz: The concept of reducing holdings in poorly rated stocks and reallocating to stocks in clear uptrends makes sense. What are the potential obstacles you face in the adoption of TCR?
Pellegrinelli: I have to say that we are experiencing a growing demand for our solutions as the asset management industry is turning more to the adoption of alternative data and advanced analytics. The challenges portfolio managers face are not only related to delivering more value to investors, but also to stay in line with risk controls, to increase efficiency, and drive down costs. However, sometimes we still meet resistance to innovation and change.
The evolution of incorporating objectively based technology versus subjective human instinct is still a barrier we run up against. Skepticism can be a problem and inertia is even more challenging. Some managers look at their investment process as rock solid, without acknowledging that the entire dynamic of investment management has dramatically changed over the past decade. Some reject any potential improvement as unnecessary, despite the fact that their performance figures may show otherwise.
Hortz: Any other thoughts or recommendations you can offer advisors and asset managers on this new investment technology?
Pellegrinelli: To work with investment professionals, we readily offer free evaluations of our data and technology platform to let them put our tools to the test. We encourage those interested to run an actual performance comparison of sample portfolios with and without using our methodology. Facts will show if what we say is true.
We invite you to explore our asset management toolkit on Bloomberg or visit us on our website to see how we work with professional investors.
The evolutionary trend toward higher standards of value and efficiency by combining elements of both human knowledge and technical innovation will force a change away from the status quo. And our proposition is simple and clear — “get the trend allocation right and beat passive products.”
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