Better Data and Tech for Active Portfolio Managers

[Data is at the core of all decision-making in investment management. The existence of massive sets of new data and information now offers asset and wealth managers competitive opportunities to enhance their investment research and performance. Through the pandemic, or even because of it, the interest in employing data, AI and analytics has been increasing. It is important to note that a consequence of this may be a growing divide between those investment managers that are able to exploit the advantages of data and analytics to drive performance and growth, and those that fall behind. 

To explore some of these newer advanced analytical tools available and how to apply them to your investment process, we reached out to a leader in this field and Institute member, Rocco Pellegrinelli, CEO of Trendrating – a Swiss-based company providing advanced price trend analytic solutions for active investment managers. With the ongoing perceptions emanating from the active-passive investing debate and SPIVA performance reports driving flows to passive funds, Trendrating is taking on the challenge to prove that active managers can beat the benchmarks and passive fund performance with the right tools and market intelligence added to their investment methodologies.]

Hortz: What do you see as the main challenge for active portfolio managers and advisors today?

Pellegrinelli: The main challenge for active managers is performance. According to the SPIVA reports (S&P) a large part of mutual funds underperforms the benchmarks year after year. The most recent 2021 year-end report stated 76.67% of U.S. mutual funds underperformed the S&P500 and 73.24% of European funds underperformed the S&P Europe 350.

I strongly believe this is because there has been a fundamental change in stock market dynamics and old-school investment methodologies cannot handle this fast-evolving environment.

The price trend of individual securities is influenced by new forces at work. For example, rapid economic developments, social media influence, investors sentiment evolutions, growing momentum investing, faster reallocations from big funds contribute to and accelerate up and down trends, and reduce the relevance of fundamentals.

Hortz: What do you feel is the solution to this problem?

Pellegrinelli: Managing portfolio risks and maximizing performance is difficult without the ability to incorporate analytics specifically designed to discriminate and validate the actual trends happening in the markets and around individual stocks. These analytics can provide a sanity check on assumptions and opinions.

Price trends exposure is the driver of performance. Acknowledging and respecting trends is the essence of successful investing.

Hortz: Can you give us a better understanding about what types of price trend tools are available?

Pellegrinelli: Different methodologies and tools are available to analyze price trends. From technical analysis indicators to momentum metrics. But often those techniques present limitations and drawbacks including late reaction to trend reversals, conflicting readings during short-term volatility, scarce robustness across different stocks and changing market cycles, inconsistency between historical tests and actual behavior, and limited scalability.

We believe that the best results are produced by systematic models using multiple data points, designed to perform across different market regimes and massively tested on thousands of securities.

Hortz: How exactly can active managers benefit from these analytic tools?

Pellegrinelli: Professional investors can enhance their analysis and investment decision framework by incorporating additional market intelligence and checking more boxes to become more in-synch with the actual price developments.

A “validation” of holdings and investment ideas at the price trend level is a sound, rational, pragmatic option that can contribute to maximizing returns and controlling risks. Stocks offering quality and good fundamentals but displaying a negative price action signal that the buy-in from the investors is not there and has a high probability to underperform.

By respecting price action, you can make trends work for you.

Hortz: What kind of opportunities does trend validation analytics open up?

Pellegrinelli: The impact of navigating price trends for active portfolios can be figured out by simply observing the performance dispersion of stocks. Performance dispersion is measurable in any investment universe, however selected and applies to any strategy (size, value, growth, ESG, etc.)

This dispersion is a repetitive phenomenon producing remarkable opportunities as well as risks. It provides a great opportunity for investors that have the right tools to capture a reasonable part of the winners and avoid most of the big losers. It can also fine tune any “buy” or “sell” decisions the active manager is considering.

Hortz: Are there any other use cases you have seen from your clients using price trend analytics?

Pellegrinelli: There are many other use cases or ways of extracting value from price trend analytics for different tasks that we have seen from over 200+ institutions that use our advanced analytics and technology, including: ranking and validation of investment ideas; identification of new opportunities; spotting new risks across holdings; portfolio optimization; tactical allocation; smart beta strategies; validation and reporting; and designing, testing and optimization of investment strategies that combine solid fundamentals and trend selection.

Hortz: What evidence can you provide of the value of price trend analytics?

Pellegrinelli: Our unique price trend system designates positive and negative trending stocks – with and rated outperforming trending stocks and and price underperforming trending securities – enable managers to maximize the performance and control risks are documented by our monthly research briefs which we publish on the NASDAQ Financial Advisor Center.  

Let us also offer two charts we developed that provide statistical evidence of the Trendrating price trend model accuracy in identifying the big movers, in this case U.S. large and mid-cap stocks with data as of Jan 19, 2022. This represents analysis of the percentage of securities recording a trend up or down (as measured with +20% and -20% minimum) that have been identified by the model and the average percentage of the whole move captured by A or B stocks on the upside and C or D stocks on the downside.

We welcome beginning a dialogue with active managers to share our research and we offer the ability to directly track the accuracy of our price trend model in real time in any investment universe of choice via a free test.

Source: Written by Bill Hortz, Founder & Dean, 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 – Ultimus Fund Solutions, NASDAQ, Pershing, Fidelity, Voya Financial, Advisorpedia, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines).

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