The current health, economic and market crisis will force all of us to re-evaluate our core assumptions and established ways of doing things. There most probably will not be a “V” shaped recovery to all things the way they were but, instead, hopefully this “perfect storm” will catapult us towards better more knowledgeable decisions and processes, as well as, improved ongoing risk protections in all areas.
As for investors, they will be forced to acknowledge the capital markets as far more complex today with “black swans” here to stay due to an increasingly global and faster-moving world. This will lead us to explore substantially more ways to effectively control losses and limit the damage to investments as an ongoing occurrence to be prepared for. This recent rapid market implosion may very well shift flows from passive to active managers that employ investment strategies and tools that offer more responsiveness to market disruptions.
To explore this further, we went to Institute member Rocco Pellegrinelli, CEO of Trendrating—a Swiss company providing advanced analytic solutions for active investment managers—who has been actively promoting this more dynamic risk management mindset. We invited him to share his firm’s experience in developing price trend capture analytics and how these systems address the growing concerns of investors.
Bill Hortz: Why do you say that the markets today “require” advanced analytics and new investment management tools?
Rocco Pellegrinelli: We are coming from a biased experience of a bull market in equities lasting 10 years and producing gains of 325% (SP500 from 800 in 2009 to 3400 in 2019).
Problem number one is that too many investors became complacent and did not prepare for the next bear trend by resisting and missing the opportunity to strenghten their decision process and expanding their market intelligence with the use of modern, sophisticated data and tools.
Problem number two is the impact of ETFs—a time bomb ready to explode. As ETFs received a massive flow of redemptions, day after day, they have been forced to sell all the securities in their list. They indiscrimately had to dump the bad as well as the good stocks, irrespective of the real economic impact of the lockdown across different sectors and companies. The result is that more than 85% of US listed stocks lost 25% or more of value in 20 days. Even in the 1987 crash it took at least two months to record such a damage.
Active managers need to adjust to increased volatility, price stampedes, and quick reversals. Risks and opportunities will emerge at a frantic pace, as we have seen recently, and reacting quickly will certainly dictate future performance.
Advanced analytics and new generation investment management technology are required to successfully handle the more challenging market environment we face for the foreseeable future, with risk management being at the forefront. It is important to note that price trend analytics can be applied neatly into any investment methodology, acting as another layer of intelligence and an overlay on a manager’s strategy. There is no logical reason not to add this capability as a precision research tool with the nature of today’s markets.
Hortz: How did most portfolio managers handle the recent market crash? Did they managed to limit the damage?
Pellegrinelli: Using well validated investment models made a difference for some portfolio managers, limiting their downside risk. Good models are disciplined, objective, pragmatic, un-emotional and are prepared to make quick, specific actions immediately when market actions trigger them.
The bear trend of March 2020 was unprecedented though, as we just discussed, in terms of speed. The extreme volatility and the unexpected severity of the losses exposed how inadequate most of the traditional, old-school methodologies, including the over-reliance on fundamentals and analysts, as many portfolios could not mitigate the damage. It is time to face this reality.
Hortz: How do these new investment tools help you limit the damage when a market crash strikes? Can it help warn investors?
Pellegrinelli: Advanced analytics and new generation price trend models are commercially available to provide such an edge. But let me point out that, besides downside protection, they also can help to quickly identify and capture those positive trends that will emerge in very selective ways across sectors, independently from what the indices will do. It is time to incorporate alternative data, advanced analytics and price trend models in the investment decision process that can change the game.
By way of example, here is a link to a sample track record of the actual analytics that our investment clients recently received. The robust downgrade from our price trend analytics tool to a “C“ rating across world indices alerted our customers to the start of a bear trend.
Hortz: What other benefits are there for active managers in embracing these tools?
Pellegrinelli: Active managers, using all the available modern tools, have a fair chance to fight back and recoup credibility as protectors of capital, creators of value, and gain back a good part of the assets that went to passive products over the last five years. Active managers now can fight back against passive products, after years of increasing market share losses. But, fundamental analysis and subjective valuations are not enough. They will have to realize that to deliver value they will need to incorporate intelligent, proven and fast “trend capture” methodologies that can add an extra level of sound risk control and quick validation of investment ideas.
Hortz: Any final thoughts or recommendations to share with advisors and asset managers?
Pellegrinelli: Steve Jobs once stated that “innovation is the only way to win.” I apply that for many active managers as “innovation is the only way to survive and prosper.” The enemies of innovation, and our relentless search of excellence in what we do for our clients, are skepticism and inertia, which only protects the status quo. It is time to adopt data and analytics of a new generation.
New analytic models help to double-check opinions, react quickly to changed conditions, and provide guidance during times of extreme confusion and uncertainty. Trendrating provides critical market intelligence via a unique methodology to “rate trends“ that fills a critical market intelligence gap and is now part of the investment decision process at more than 100 premier institutions in the asset and wealth management industry. We welcome you to explore and follow some of our research and white papers on our website to learn more about price trend capture intelligence and its applications for your investment strategy.
By Bill Hortz, Institute for Innovation Development
The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors—Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor magazine). For more information, click here.