The new market regime is exposing the inadequacy of some conventional data, tools and methodologies in managing the increasing risks and delivering performance. It is time for a pragmatic reassessment of traditional strategies. We asked the opinion of Rocco Pellegrinelli, founder & CEO of Trendrating, an innovative wealth tech firm providing advanced analytics and sophisticated tools for portfolio management to more than 200 premier clients on a global scale.
Some experts say that the stock market is more difficult to read now than in the past. What is your opinion?
In the past the correlation between the price trends of stocks and fundamental analysis was relatively stable. Today several factors can influence and drive the price action of individual stocks. Sentiment, social media, the impact of momentum investors and the investment decisions of some of the sovereign funds can generate trends irrespective of a company fundamentals. And a fast changing economic landscape, with too many interrelated variables, makes forecasting a company growth and profitability very challenging. In this new market regime it is safe to expand the analytics and the tools well beyond the conventional metrics and assumptions. More advanced methodologies are required to navigate and exploit the performance dispersion.
How is the asset management industry handling the new challenges?
There is a broad underperformance problem. Over a 15-year horizon, more than 70% of actively managed funds failed to outperform their comparison index in 38 out of the 39 categories of equity and fixed-income funds that SPIVA measures performance. So-called equity long-short funds, which try to buy stocks likely to do well and bet against names set to perform poorly, have underperformed the US stock market in nine out of the past 10 years, according to Nasdaq eVestment. Source: Financial Times. Considering that the majority of the portfolio managers use a discretionary approach , as this is the well established, consolidated way to make investment decisions, it is reasonable to assume that the underperformance is related to the discretionary decision process.
What is the solution?
We believe that adding a layer of systematic control to the investment process can have an impact in terms of improved risk control and enhanced performance. A systematic approach provides several advantages. It makes easy to analyze and validate the alpha generated by the chosen investment rules via a rigorous historical test across different market cycles. The ability to produce statistical evidence of the strategy value is important to build confidence. A discretionary strategy is difficult, if not impossible to test and therefore there is no way to discover any possible weakness across the market cycles. The rules and parameters that drive the investment decisions are fully transparent and consistent in a systematic strategy and the execution is guaranteed to be coherent. The discretionary methodology may follow different, changing guidelines and is subject to the personal opinion and judgement of the manager. Therefore, by using some elements of systematic management can make the investment process more robust and transparent. Many underperforming strategies are the result of a discretionary approach based on subjective assumptions and a lack of operational discipline.
How Trendrating is addressing the problem?
A. our platform enables investors to upgrade to a more systematic methodology. Discretionary managers can easily test a number of selection rules from a rich data set including fundamentals, quantitative and trend parameters. Our clients can learn what is the real alpha contribution of any parameter across the years. They can explore and discover the most profitable combinations, checking more boxes. For example by blending strong growth of earnings and sales and confirmed positive price trends. For discretionary managers we provide valuable insights that can give a boost to their performance. On the other hand for investors that already use a systematic approach we make easier to build, compare, validate and execute a systematic strategy. Benefits are additional intelligence, full scalability and time saving.
Can you give us a practical example?
A. let’s talk about risk management. We developed an AI-driven, multi-factor model that assigns a rating of the price trend to over 20,000 listed securities and indices. A rating of A or B confirms a positive trend, and a rating of C or D signals a negative trend. The rating can be used to validate investment ideas and to spot specific risks. Our solution also enables to calculate the aggregated rating of portfolios. Trendrating introduced a new element of risk control. The portfolio’s rating is based on the allocation to rising vs. falling stocks. This supports investment decisions aimed at maximizing the exposure to stocks in a bull phase and reducing the weight of stocks in a bearish price action. The higher the portfolio rating the better the chances to outperform. The lower the rating, the bigger the risk of losses. There is an obvious, high correlation between the portfolio’s rating and the performance in the following months. For example, a “B+” rating confirms that the trend exposure is safe as less than 25% of the holdings show a negative trend. On the other hand, a “C-“ rating signals that the allocation to falling stocks is in excess of 50%, presenting a high-risk structure. This innovative perspective of risk control, based on trends validation is a key contributor to a more efficient and better informed performance management for active managers.
Any final advice?
A more challenging market cycle is raising the bar to deliver performance. The limits of traditional analytics and theories proved their weakness in 2022 and will continue to disappoint across the sequence of up-and-down waves of the new regime. Generating alpha requires smarter knowledge. We believe that many portfolio managers deserve to access more facts and intelligent data to maximize their opportunities to excel. The quality of the information impacts the quality of the investment decisions. It is time for an overdue evolution toward better solutions for professional managers and advisors, as conventional content and tools that worked during the bull trend will disappoint in the new regime. Our company is committed to supporting in the best possible way those investors that want more from a provider, are open to innovation and recognize the challenges ahead.
About The Founder
From starting as a portfolio manager to founding Trendrating, Rocco Pellegrinelli, Founder and CEO, has come a long way. He launched Brainpower in 1996 and established it as one of the top portfolio management systems globally. After taking the company public on the Frankfurt Stock Exchange in 2000, Brainpower was acquired by Bloomberg in 2006. Then, he started a research and development project to design a superior model to capture price trends in listed equities. After a few years of massive testing of 350 indicators and thousands of combinations across 25 years of history for 20,000 securities, he got what he wanted. It helped to have the support of a fantastic team of experts, now part of Trendrating, a leading provider of advanced analytics and leading-edge technology for equity investing, serving more than 200 institutional customers on a global scale. In 2020, Rocco was nominated as one of the “10 Most Inspiring CEOs to Watch” by Industry Tech Outlook and one of the “10 Best Innovative Leaders” by DigiTech Insight. Rocco is also a Nasdaq contributor to their advisor portal.