Hortz: Hasn’t the industry already been introduced to quant-driven automated and semi-automated technology solutions?
Pellegrinelli: What we call systematic portfolio management is not quantitatively driven or designed only for that type of quant investor. Fund managers should be able to continue with their existing philosophy, whether it be value oriented, growth, ESG, multi-factor, etc., and take it to the next level by running their portfolios systematically to achieve better and more consistent results. The nature of systematic portfolio management should also allow for performance in bull or bear markets with a choice of long, short and market neutral biased approaches.
We have seen how systematic management of equity portfolios is objectively superior to discretionary management. It can often improve performance, cost efficiency, and profitability. With fundamental active management increasingly struggling to deliver consistent outperformance versus benchmarks over the medium-to-long term, a systematic model-driven decision-making solution offers managers the necessary tools for both performance and risk management to address the increased complexity of stock trends.
Hortz: Can you give us a few use cases of how advisors and asset managers are integrating this technology to their core investment methodology and process?
Pellegrinelli: OK, here are a few examples:
First, there is a U.S. investment advisor group that likes to build up investment portfolios off of a list of stocks that they are following. They are in control of the list, but they understand that capturing trends is quite complicated, so they use our price trend system on a monthly basis to re-adjust their positions. As well, when they want to propose to a new client a portfolio of 20 stocks out of hundreds they are following, how simple is it to run the system to select which stocks are in best trend positioning right at that moment that best satisfy their portfolio management methodology and criteria.
Second, another example we have, is a Zurich-based mutual fund company that have just started to launch specific mutual funds based on a fully systematic approach. They are putting these new funds in competition with internal managers with the ultimate goal of finding a way to merge the two. That one is quite interesting.
Third, there is an asset management firm in the UK that uses an investment methodology focused on allocations across sectors and countries. They decide the allocation of their holdings based on the ratings that our analytics system offers. So, for example, say the consumer sector has 70 % of stocks trending up, that rating gets a B+ and the technology sector has only 50% of those stocks trending up, that receives a C- rating. The firm then invests more money into the specific sectors that shows more participation in terms of positive moves.
Fourth, there is a U.S.-based RIA using an ESG focus without a great deal of research or advisory around it. Trendrating gives them a way to develop a strategy around their ESG universe of stocks that they can load up and follow price capture trends on those chosen ESG stocks.
Fifth, market neutral strategies are another important investment approach that many independent firms are interested in. But, in market neutral there tends to be a trap of many advisors going to cash and trying to time the market, which is problematic at best. We can offer them a way to capture price trends in either direction to stay clear of or take advantage of stock movements and stay invested without timing the market issues.
Our new system, called the Systematic Management Solution (SMS), makes it possible for a manager to pick a number of parameters to achieve exactly what they want. For example, you can tweak different indicators to specifically reduce volatility. It is up to the manager to decide on the parameters and tweak the profile of what kind of returns they would want in any asset class or investment style.
Hortz: Can you tell me how Trendrating is developing its technology towards addressing this need for commercially available systematic portfolio management solutions?
Pellegrinelli: Our development team spent over a year building upon Trendrating’s existing trend capture platform to create our new Systematic Management Solution. SMS combines advanced analytics, a unique rating methodology, and a powerful calculation engine, developed over the years by Trendrating and was designed to deliver alpha, which is completely measurable and repeatable. It covers over 15,000 global securities, and contains a highly intuitive, point-and-click interface for codeless programming of highly sophisticated strategies.
The SMS is a powerful system that uses our Trend Capture Model and other advanced analytics to build, test and execute tailored investment strategies from over 50 user defined parameters to choose from. The portfolio manager selects the list of stocks that satisfies their specific criteria (Large Cap, Value, Growth, ESG, etc.) and SMS selects the stocks with the highest probability of superior returns to be rebalanced monthly or quarterly.