By Rocco Pellegrinelli, CEO, Trendrating
Active managers often enjoy a level of compensation that can seem incompatible with their actual performance: over the past decade, 86% have not beaten their benchmarks. For their failures, they are rewarded with substantial annual fees: one fund dropped in value by almost 10% in 12 months, but the company still claimed an outperformance charge.
Fund managers are subject to emotion and bias and are not immune from erratic decisions and underperformance. Where investors might once have put their faith in an active manager, many are turning to low-cost index funds which don’t aspire to beat the market but at least won’t underperform it.
The result is that asset management profits are slated to fall by a third over the next three years, according to new research from McKinsey. If fund managers hope to survive, they will need to re-examine their strategies and consider investing in new technologies, such as the new generation of momentum analytics.
Momentum analytics software
The idea behind price momentum is very simple: stocks that perform well are apt to keep performing well, and funds that perform poorly are likely to continue their downward trajectory. Of course, knowing this and taking advantage of it are two different things. How do you differentiate a blip or a fluctuation from a genuine, meaningful price move? How can you filter out market noise and false moves?
This isn’t to say you shouldn’t ever trust yourself or your instincts, of course. But intelligent, disciplined investing requires certain checks and balances – and the right technology can provide them. At Trendrating, we’ve designed our Momentum Analytics Platform to provide an objective assessment of trends. We developed a sophisticated model to identify early key trends and rate them based on the quality, allowing investors to identify and act on price moves with little delay, and to capture the large part of any meaningful trend over a longer period of time. The platform uses a rating system based on four grades: an “A” indicates a strong bull trend; a “B” highlights a bull trend; a “C” reveals a bear trend; and a “D” suggests a strong bear trend. It’s a simple, actionable metric that gives fund managers the ability to make consistently informed, objective and profitable decisions that improve performance whilst lowering risk.
Our recent 1.3 update has focused on personalisation, risk control, and usability. Alongside user experience tweaks such as Excel integration, it’s now possible to make performance comparisons for individual holdings in a portfolio – allowing you to highlight stocks with negative momentum and adjust your approach accordingly. Users can now access 15 years of back tested results in a matter of seconds. We’ve also introduced a net alpha calculator, which illustrates the efficacy of momentum strategies in sleek graphical form: alongside a set of strategy building variables designed to support full personalisation.
It’s the most sophisticated version of our technology yet – and we’re just getting started. Already used by dozens of fund managers across Europe, the company’s immediate future includes a collaboration with FTSE Russell to develop data-driven momentum indices, and further improvements to speed, functionality, and accuracy.
A change of mind-set
A true expert knows their limitations – happily, technology can overcome them, as evidence suggests that models outperform experts, on average. There has been a cultural shift from experts to models, as investors increasingly use models to add intelligence and discipline and support decision making.
Factor-based investing is also on the rise. A recent poll by State Street Global Advisors (SSGA) suggests investors are turning to objective, factor-based approaches in order to try and improve performance – 97% institutional investors surveyed expect significant change in the industry’s investment approach over the next few years.
Momentum has the highest Sharpe ratio, and historically outperforms other factors such as low volatility or value. Momentum investing in particular is well-served by models like Trendrating, which can provide objective analysis of trends. Issues with early momentum models – which tended to rebalance too infrequently to identify real price action – have been ironed out by technological advances.
The upshot of all this is that capitalising on trends is a simpler, more efficient process than it’s ever been. Knowing when to sell or hold a particular stock – or indeed, when to buy more – is no longer a matter of informed guesswork: it is now possible to make intelligent, data-driven decisions, and to do so quickly and responsively. Momentum investing is here to stay and in fact is becoming increasingly important as markets are more and more driven by liquidity flows and investor sentiment, and are less linked to fundamentals. Investors should embrace the future, or risk being left behind.