[Professional investment management has always been challenged to validate and rank investment ideas, develop rule-based risk management, and design, test, and execute advanced investment strategies in their portfolio management and optimization efforts. This endeavor has been aided over time with the discipline of mathematics and technology.
To address this ongoing evolution and the performance challenges that managers have wrestled with, we reached out to Institute member Rocco Pellegrinelli, CEO of Trendrating – a Swiss-based company providing advanced alpha discovery analytic solutions for active investment managers to help them beat benchmarks and passive fund performance with the right tools and market intelligence added to their current investment methodologies. We asked him questions to better understand what he feels is a pragmatic perspective on how to help professional investment managers as a performance management partner.]
Hortz: What concerns you about historical active investment manager performance?
Pellegrinelli: In theory, active funds, with their meticulous stock selection, should outperform their benchmarks. But in reality, they often fall short, consistently underperforming the market indices. The industry of actively managed investment products seems to be failing to deliver the value that it is supposed to produce. I am forced to say this because over the last 20 years according to Alpha Architect:
93% of funds underperformed the benchmark S&P Composite 1500.
94% of large-cap funds underperformed the benchmark S&P 500.
94% of small-cap funds underperformed the benchmark S&P SmallCap 600.
95% of mid-cap funds underperformed the benchmark S&P Midcap 400.
94% of multi-cap funds underperformed the benchmark S&P Composite 1500
Similar results were found for growth and value funds of various capitalization categories. This underperformance has further been verified by the SPIVA Scorecard. Many managed accounts just record similar shortcomings.
Hortz: Why do you feel that most investment managers have historically underperformed their benchmarks and indices?
Pellegrinelli: Part of the problem can be the result of a lack of better information and excessive faith on hypotheses and assumptions. Conventional research, data, and tools seem to be inadequate at delivering alpha. In fact, testing and demonstrating their actual value has been quite a challenge. Money managers need and deserve better information whose added value can be measurable.
Taking for granted ideas and assumptions can also be unsafe. Professional investors should profit from technology that enables them to run a factual test of the chosen selection rules and validate them across different market cycles. Only a disciplined, objective assessment of the true performance of the investment rules can expose any drawbacks and trigger the necessary adjustments.
Hortz: What do you recommend that investment managers do to fix this problem?
Pellegrinelli: Delivering superior performance is possible if one can find the facts and get the answers to critical questions like:
• What selection criteria are best rewarded by the market over the cycles?
• Which fundamental parameters yield the greatest profits by identifying outperforming stocks?
• Which combinations of selection rules offer robust evidence of consistent outperformance?
It is then critical to have access to market intelligence of higher quality and to the insights that only a sound fact-finding process can provide.
Hortz: What do you see as the best opportunities for investment managers to focus on?
Pellegrinelli: Performance dispersion is a repetitive fact in every market cycle, and I firmly believe it offers the way to finally deliver superior performance. A smarter information framework can better support exploiting the performance dispersion across stocks. As an example, here is the dispersion in the S&P 500 investment universe across 2022 and 2023:
The ability to discriminate between winners and losers can have a big impact on returns. Investors who can maximize the portfolio exposure to stocks in the top 25% while limiting the positions across the bottom 25% can easily outperform the relevant benchmark.
Hortz: What solution have you developed to address this opportunity for investment managers?
Pellegrinelli: Our performance management solution for managers is the development of a system that opens a wealth of meaningful information and insights through access of a rich data set organized around fundamental, quantitative, performance dispersion, and trend validation analytics.
The mission of Trendrating is exactly to fill this critical gap and to provide the intelligence and insights that can help exploit the performance dispersion across stocks. The starting point is fact-finding and unveiling which parameters can best capture alpha. Our solution enables efficient discovery via rigorous testing, optimization, and validation of the actual alpha contribution from any parameter and combination. We enable hard fact-finding to support a robust, logical investment process, avoiding the traps of unproven assumptions.
Our performance management platform is specifically designed to generate visible, documentable alpha via a combination of smarter insights to capture the winners and an innovative methodology for more effective risk control.
We affirm that our analytics and technology overlay can improve investment performance for portfolio managers across all investment styles and methodologies. This approach sets us apart from other providers setting a new standard of value for professional investors. We offer free trials to prove it with facts.
Source: The 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 operate as a business innovation platform and educational resource with FinTech and financial services firm members to openly share their unique perspectives and activities. The goal is to build awareness and stimulate open thought leadership discussions on new or evolving industry approaches and thinking to facilitate next-generation growth, differentiation, and unique client/community engagement strategies. The institute was launched with the support and foresight of our founding sponsors — Ultimus Fund Solutions, FLX Networks, TIFIN, NAIFA, NASDAQ, Advisorpedia, Pershing, Fidelity, Voya Financial, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines).