The Necessary Human Element Needed in Advanced Analytics

Top 2020 Articles From The Institute For Innovation Development

One thing that the history of innovation teaches us is that it is not just new technology that is needed, but how you use that technology in relation to your particular challenges that is the key to adopting to change. Many times, combining the best of something traditional with the best of something new tends to create a powerful step forward to carving a new path. Learning to deliberately combine these seemingly opposing factors into a hybrid approach has been the basis of many innovations across industries.

Due to the changing nature of the investment markets adding to the increasing complexity, uncertainty and volatility of our current environment, there is a great need for new tools and approaches to the investment process and risk management. In response, there is a growing number of emerging FinTech and advanced analytics tools evolving that are unfortunately not being adopted fast enough because of personal fears of disruption and being rendered obsolete in the eyes of clients.

The history of innovation also clearly documents that these fears always appear at these junctures and slow the much needed adoption of new tools and approaches. But as the saying goes that is most relevant to our situation today – the only thing to fear is fear itself! In an environment of accelerating change, this is the time to be forward-looking and brave in experimenting and trying new approaches. There is no standing still or going backwards to hold on to a nostalgic business notion.

To help address this fear among many advisors and asset managers in deploying new technology in the investment process, we asked Institute member Rocco Pellegrinelli, CEO of Trendrating – a Swiss company providing advanced price trend capture analytics for RIAs and active investment managers – to help us think this out together and address this limiting mindset. The truth is that we need to see how an advanced analytics tool can complement any investment methodology and be purposely controlled and directed by the money manager, not the other way around.

Hortz: What are some of the biggest challenges facing fund manager in today’s Market?

Pellegrinelli: The active management of equity portfolios and funds has been facing increasing challenges over the past decade. Biggest of all is that fundamentals and price trends are often out of synch, as the actual trends are driven by large institutional money flow that is often influenced by a complexity of other factors including social media sentiment, 24×7 global news coverage, and macro-economic and political events. Generating superior and sustainable performance in this environment is difficult, as evident in the track record of mutual funds where 70% of managers underperform their relevant benchmarks (Source: S&P SPIVA Report).

The only logical way to combat these challenges is by adopting innovative technology solutions that are capable of processing “Big Data” in a way that doesn’t replace the fund manager but can do the work of an expensive team of data experts. 

At the same time there is a growing pressure on investment firms to stay profitable, pressuring executives to find ways to make their operations more efficient and drive down costs. Most firms cannot afford to hire a team of quantitative analysts and software developers to automate key aspects of their investment process. FinTech vendor solutions can fill a critical gap to asset managers in this regard.

Hortz: Are you then advocating a form of Robo Management for RIAs and Asset Managers?

Pellegrinelli: Not exactly. The term “Robo” is often misconstrued by the media as a cyborg replacing humans when, in reality, it simply refers to a technology tool or platform. We see Portfolio Managers still in charge of choosing the underlying investment universe, constructing the portfolios, and inputting all the decision criteria. In this hybrid approach, the Portfolio Manager selects the investment universe of choice, runs it through their existing investment selection filter first, and then assigns a set of rules and mandates for the analytics system to make decisions objectively, without the usual discretionary traps of bias or intervention.

Many top-tier Hedge Funds have relied on computer-driven models run systematically based on the inputs of their creators. But there are thousands of firms that cannot afford all that is necessary to hire the proper people to build their own tech platform around their investment analysis process. But now with vendor-provided solutions hitting the market, the dynamic is shifting for small-medium sized fund managers and RIAs to take advantage of cutting-edge technology to compete with the major players.

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.

SMS facilitates performance tracking, rebalancing and detailed analysis that can be exported in PDF/Excel format. Buy/Sell lists are generated automatically on the rebalance date and are traded outside of Trendrating.

This is a disruptive innovation that can deliver great value, efficiency and cost control. Adopting SMS is a no risk decision, as the test, analysis and validation of the strategies are offered at no cost, in order to let managers directly evaluate the results before making a purchase decision.

Hortz: What do you recommend that advisors do to build enough confidence to consider deploying some of these new tools as part of their investment management approach?

Pellegrinelli: It helps if you can show that the technology system and its resulting models have been thoroughly tested, where you can see the reports, the analytics, which we can demonstrate. A model can be tested massively over the last 20 years so you can have a sense of what a model can deliver in different market environments – bull, bear, ranging phases. A manager can then employ and observe the system in the real world to see if there is a continuing consistency. This is a good way to build up confidence in learning how to use this technology.

Hortz: If you had to pick one key benefit that SMS provides fund managers, what would it be?

Pellegrinelli: The key benefit is in identifying areas of performance dispersion within a fund manager’s desired investment universe (S&P 500, Russell 1000, MSCI ACWI, etc.) and investing systematically in the strongest rated stocks in the top quartile, using customized parameters. This is something we refer to as “The Investment Edge”.

Performance dispersion exists and offers outperformance opportunities to be captured by smart investors. Trendrating provides a unique rating model and additional advanced analytics designed to capture trends, identifying most of the strongest and weakest constituents in any equities universe within a yearly horizon. Our model offers a unique rating of trends where A and B indicate a bull trend and C and D mark bear moves. The additional advanced analytics support a further quality ranking, measuring the strength and the consistency of the positively rated trends.

Any investment strategy can be enhanced by a better synchronization to trend development. Most investors use numerous metrics based on fundamental and quantitative data, but very few measure in a proven, objective and systematic way the real direction of price trends and remain hostage to market noise and opinions, despite the fact that capturing trends is the key to better returns.

Hortz: Any last points you would like to share with RIAs and asset managers?

Pellegrinelli: There is still a lot of education that needs to be done which includes building trust in the analytics models. We need to be constructive and tell people that there are tools that can help RIAs and asset managers be more effective. You can generate extra alpha and reduce risk exposure in your client portfolios if you incorporate a discipline that only advanced analytics models can offer. We invite you to explore our research, White Papers, videos, and monthly research briefs to learn more.

We firmly believe that active managers have a great future if they can level the playing field by incorporating intelligent analytics and alternative data methodologies that can add alpha and more risk control to whatever strategy they have in place. We see an important hybrid model going forward where humans are in charge of making the decisions, but they let advanced technology-based models and tools help in identifying and capturing the trends around their investments. The truth is that there is an increasing need for advanced analytics and new systematic models to be run by humans, not to replace them.

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.

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