The investment world would do well to take some cues from the world of sports regarding its advanced use of data analytics and data science, said Rick Di Mascio, founder and chief executive of Inalytics at the Investment Magazine Fiduciary Investor Conference.
“The parallels between the investment world and the world of sports are really quite extraordinary,” he said.
“They are both skills-based activities, and are under the same kind of performance pressures, but sports are just decades ahead of us in terms of how they use their data to improve players and the overall game.”
Inalytics processes about 700 portfolios from around the world every month, developing one of the world’s largest databases of investment decisions, and giving Di Mascio an insight into what characteristics make a skilful fund manager.
“The single most important point and the starting point, is the research process,” he said. “This identifies how someone investigates ideas and gets the best of them into the portfolio.”
Di Mascio’s data shows 80 to 82 per cent of outperforming portfolios have demonstrable research skills.
This gives clients a clearer understanding of what they must ask their managers while performing their due diligence: how does the research process work, how is it structured, how successful is it and has it been identifying winners and getting them into the portfolio.
Another data point that Di Mascio’s research has thrown up is the inability of many fund managers to actually sell positions, when they are far past their due date.
“Fund managers lose about 100 basis points through lazy selling,” he said, pointing out the industry has moved firmly towards highly concentrated, low turnover, high conviction portfolios that often have very stale long-term positions.
“It’s sort of like topping up the barrel with great ideas but it leaks away with the long-term positions that have got past their sell by date,” he said.
“It’s called alpha decay.”
Di Mascio described one manager who had a ‘fantastic touch’ but if he held onto a stock for two years and a day, he lost money in 100 per cent of cases.
“Despite the fact I sent him a report for everything he owned for more than two years, he carried on owning them and carried on losing money,” he said.
“People do fall in love with their stocks, and forget to be as disciplined when the data tells us very clearly how to avoid losing money.”
Those hoping to use data science as a tool to assist in performing due diligence, must be clear about how the activity aligns to the outcome.
“If the outcome is to identify investment skill, then visiting somebody in their office and drinking coffee may not be necessarily associated with the thing you’re looking for,” he said.
Ultimately, data can help investors engage with the people who can actually generate alpha and can elucidate whether they will be sustainable, Di Mascio said.
Di Mascio’s systems analyse every single investment decision, including things like every purchase, every sale, every position for every day, and can see how an investment manager’s track record came about.
“We all know that track records tell you absolutely nothing other than just whether you won or lost the game,” he said.
“But specifically, data science can explain why they won or lost, whether it was luck or judgement.”
Di Mascio points to the film Moneyball, where a baseball team leveraged data analytics to gain an edge over competitors and found they were paying above and beyond for a ‘guy with a good arm’.
“Well, it proved to be absolutely useless, which is why you want to have data,” he says. “If you’re paying fees for investment skill, then it’s best that you actually know what that skill is.”