[Shifting investment markets driven by uncertainty and volatility create challenges and opportunities. According to Nigel Bolton, co-global head of equities at BlackRock — “Investors can now expect a decade of higher inflation and lower returns.” Many analysts are calling it a “regime change” in financial markets and warn that this can expose the inadequacy of several conventional investment strategies like index investing. In this new market cycle, it will become vital to have the tools to spot emerging risks and opportunities across stocks. The ability to act quickly will make a difference in an unstable market.
To explore how to respond to this changing investment cycle, we went to Institute member Rocco Pellegrinelli CEO of Trendrating — a Swiss-based, global leader in the field of advanced analytics and “trend capture” technology providing advanced price trend analytic solutions for active investment managers. He has stated that “many analytical tools make sense, but do they also make money? It is time to bring real value to fund managers.” He launched Trendrating with the mission to provide innovative analytics and technology that can deliver alpha in a measurable, actionable, and repeatable way. He strongly believes that adopting sophisticated analytical tools is the key solution for this new regime.]
Bill Hortz: Can you explain this declaration by many analysts and pundits about our entering a “new regime” and what are some of the consequences of this change for investors?
Rocco Pellegrinelli: History demonstrates how equity markets enter long periods of high returns, followed by lengthy periods of lower returns. These periods are called secular trends. It is important to acknowledge that investment strategies that work in bull markets may not be effective in flat or bear markets and investment managers must prepare a plan to handle this.
Index returns can stay volatile and erratic for years as the market will fluctuate with sizeable waves up and down across different investment quarters. Passive strategies after a decade of spectacular growth may prove to be unprofitable in the absence of a sustained bull market. Those investors that stick to the status quo and continue to use the exact same strategies that worked for them in the bull market will be exposed to disappointment and high business risks.
The biggest consequence of this new regime is that active management will be back in demand with performance dispersion across stocks providing the opportunity to outperform. For example, during the last 6 months ending on October 15th 2022, the SP500 index was down around 6%, but the top 25% performers in the index were up on average 16.8% and the bottom 25% were down 19.7%. Profiting from this new regime and performance dispersion requires carefully designed and well-tested strategies to select the winners and avoid the losers that exist in any market wave.
Hortz: How exactly can advanced analytics help active managers in this new environment?
Pellegrinelli: Advanced analytics are a game changer for many portfolio managers that today cannot leverage their full potential due to the lack of access to leading-edge technology that larger institutional investors have access to that provides more market intelligence, insights, risk management, and discovery opportunities.
Analytics like ours offer access to a whole world of market intelligence and insights that can support active managers to build, fine-tune, and validate their own winning strategies for the new cycle. The ability to test and compare strategies across years provides evidence and confidence.
Hortz: In this new market regime of low returns and volatility, can advanced analytics tell us what investment fundamentals work best?
Pellegrenelli: Our Strategy Builder tool, as an example, was developed to support the design, historical test, optimization, and documentation of investment strategies using a rich data set and analytics. Investment managers can select their preferred fundamental metrics to evaluate results, then explore other combinations of value and growth metrics and discover the most effective combinations of rules and parameters producing the best investment strategies for the current investment environment.
The ability to select and combine different rules and parameters empowers managers to create, validate, and document the best strategies. Our solution offers a new paradigm to leverage the investment manager’s skills and knowledge base.
Hortz: Can you walk us through an example of how investment managers can utilize these analytic tools to fine-tune their investment strategies for this investment climate?
Pellegrinelli: Here is a logical sequence supported by the Trendrating system: