The Data Deluge

Active managers are in a world of accelerating change. Poor active management performance and the search for lower fees have caused a flood of funds into passive investment vehicles and have put pressure on active funds to perform. The pressure for alpha has never been more intense, and investors need more help than ever.

As managers look for new opportunities, a key challenge they face is dealing with the volume, velocity and variety of the information they must ingest and consider before making the right investment choices to generate alpha.

For many, the barrage of information feels chaotic and stressful. Not only are active investment managers managing more stocks today, but they are facing a shrinking investment cycle as company and economic information and news is constant, instantaneous and multiplying in number and type.

However, an increase information doesn’t necessarily make an investment manager better informed. Rather, it has the potential to confuse and negatively impact the ability to cut through the noise and make the right investment decisions.

So, what approach should investment managers take in order to find the signal within all the noise?

One change has actually taken place on the research provider side, stemming from an evolution of expectations from investors. It used to be that the value of investment research from sell-side analysts was in the presentation of the data, and it was up to investors to determine context and uncover insight. Now, as investors are looking for an investment edge, they expect investment research to already include a new, interesting and unique perspective. Now the value of investment research is about the quality and exclusivity of the data included. With limited time and the need to make decisions faster than ever, investors require sell-side research to provide them with information and explain why it is unique or insightful all at once.

Faced with a sea of data, many investment managers believe the answer is to dive in and try to swim. They believe that the solution to data overload is to engage more intensely with more raw data sources. But how do active investment managers understand what is noise and what is information?

The answer comes down to technology.

Ideally, active asset managers need to be able to curate the information they receive and surface the information most important to them. This means being able to set a watch list focused on the securities, analysts and information sources that are vital to performance. It means becoming immediately aware of an important change of an analyst’s view on a company. It means being alerted to a line-item change that may have wider implications for the value of the shares. Faster decisions can open up more opportunities when time to ideation is reduced.

With technology, asset managers can change the information environment to curate content for the strategic direction of their portfolio. They can find the signal in the noise that will enable them to deliver value to both investors and their firm.

This post is an abbreviated excerpt from “The Signal and the Noise: Changing the Approach to Investment Data.”