The Opportunities For Smart Investors in The New Regime
As the new market cycle is imposing a reassessment of traditional strategies and raises the bar to deliver performance for the professional portfolio management industry, 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.
What are the implications of what the expert defined as a new regime ?
History can be of guidance here. After years of bull market a new cycle of low return usually last a few years. Some statistics can offer an idea of what we can expect.
| Dow Jones Industrial Average Historical Trends | Number of Years | Annualized Return |
| Bull: 1954-1966 | 11 | 8.72% |
| Bear: 1966-1982 | 17 | 0.05% |
| Bull: 1982-1999 | 17 | 15.30% |
| Bear: 2000-2010 | 11 | 0.06% |
| Bull: 2011-2022 | 11 | 9.16% |
| Source: Trendrating | ||
The new regime started in 2022 and is here to stay for a time long enough to force profound changes in the investment management processes. A low return cycle on indices can still offer a broad performance dispersion across stocks, and a fast rotation of sectors. Profiting from the performance dispersion is the only way to deliver performance across the ups and downs of this cycle. It is reasonable to expect an outflow from passive strategies and index-linked products, as the return from popular benchmarks can prove disappointing. Active strategies are well positioned to reward investors if well conceived and active managers will experience growing inflows.
How investors can adjust to the new cycle?
A new perspective is required. The starting point is to acknowledge the changed scenario and realize that conventional data, tools and strategies that worked in a bull market will prove mediocre in the new regime. Next is directing the focus on profiting from the performance dispersion and selectively using analytics, insights and technology specifically designed to exploit the dispersion. It is critical to evolve the information framework incorporating more sophisticated and effective data and systems that can help to navigate the ups and downs with more reliability. The quality of the data and tools inevitably impacts the quality of the decision making. But in order to select the best solutions a pragmatic , disciplined historical testing is mandatory. The good news is that the market offers a variety of advanced, new generation platforms that can generate alpha in a transparent, measurable way, easy to test and validate. In the new cycle portfolio managers can leverage their knowledge and skills with leading-edge analytics and tools and maximize their active management performance.
Some observers say that the dispersion is increasing. Is it true?
The performance dispersion is more extreme than in the past. Price trends are the result of the combined impact of buyers and sellers for any specific stock. If the aggregated money flow from buyers exceeds the outflow from sellers on a consistent basis then a bull trend is produced. A bear phase happens when the balance is weighted on the sellers side. But how investors decide to buy or to sell? Understanding this is critical. Some investors can be guided by fundamental analysis. This was a key driver of the past. Today the world is more complex. Investors can be influenced by a variety of motivations including social media influence, rapid shifts in sentiment, fast changing economic changes. The big pools of money controlled by large players as sovereign funds can decide to change the allocation on the basis of ESG and other investment policy considerations. And a growing army of momentum players create and fuel trends up and down. So at the end trends are the result of the combination of several forces at work at the same time, where traditional fundamental valuations may have a decreasing impact.
It is impossible to analyze all the factors influencing price developments and to assess what are the most relevant, but it is possible to analyze and validate price trends. Therefore it is advisable to add a layer of trend assessment to any investment decision process, as a sound, logical sanity check. t works both ways, to validate investment ideas as well as to spot new risks.
What is the Trendrating proposition?
Over the years we developed advanced analytics and innovative tools to support a broad range of critical tasks. Our mission is to help our clients to manage a few key challenges.
First. In order to profit from dispersion it is important to access the dispersion statistics across markets and sectors and to monitor any evolution and rotation. Here we offer dispersion analytics to support the comparison of opportunities and risks in different investment universes.
Second. Effective risk control across portfolios requires enhanced analytics in the new market cycle. Conventional data and tools exposed their limits in 2022, producing losses on many portfolios. Trendrating developed an AI- driven, multi-factor model to assess and discriminate medium term price trends across 17,000 securities. We introduced the “rating of trends”, a new metric designed to add a factual, pragmatic risk control perspective. As our model provides a rating on any stock, it is possible to calculate a rating for any portfolio, and to measure the aggregated exposure to falling securities. A low portfolio rating indicated an excessive weight in stocks in a bear phase, and therefore a high risk of underperformance. The additional “trend risk “ metrics that we offer enable a more rigorous and informed risk management.
Third. Picking the winners in any investment universe is even more difficult in the new regime, with more frequent and extended ups and downs. Our model can help to rank and validate investment ideas, adding an element of objective trend quality valuation. Combining good fundamentals with a confirmed positive price action is good practice. Checking more boxes can make the difference.
Fourth. Generating alpha requires knowledge. We believe that many portfolio managers deserve to access more facts and intelligent data to maximize their opportunities to excel. Trendrating solution fills a critical gap and provides smarter insights. Our technology makes easy and fast to select parameters and rules form a rich set of fundamental and quantitative data, run an historical test and measure the contribution to alpha. It is then possible to add other parameters and discover the combination that deliver the best returns. The result is a wealth of insights that can contribute to dramatically enhance the investment decision process.
How your clients use Trendrating ?
Our solution can be easily integrated in most investment decision processes, discretionary as well as systematic. The most common use cases are ranking and validation of investment ideas, identifying new opportunities, spotting new risks via alerts, portfolio management and risk reduction, sector rotation, development of strategies, model portfolios, and indices. The insights produced are usually a valuable complement to the existing information framework. But it is interesting to see that the use of our solution has experienced a strong increase across our customers base as we entered the new market cycle.
Any final advice ?
Just some practical considerations. A more challenging market cycle is raising the bar to deliver performance. Professional investors needs to be very selective in terms of the data, research, tools they use. Smarter insights, a broader analytics coverage, and platforms that enable to test, discover and develop better strategies will make the difference.
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 support in the best possible way those investors that want more from a provider, are open to innovation and recognize the challenges ahead.
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