Active fund managers face a big challenge — consistently picking winners and avoiding losers is very hard to do. How big is the problem? According to the S&P Indices Versus Active (SPIVA) Scorecard, through March 2020 more than 88% of all USA stock fund managers have underperformed the S&P Composite 1500 Index over the past 15 years.
Why Active Managers Struggle
Several factors contribute to the challenges fund managers face:
- Traditional technical analysis studies and techniques are inconsistent across different cycles and market types
- Momentum investing models often use fixed time windows, and are therefore late to react to fast changing trends because they need more time to adjust
- Fundamentals alone fail because other factors not revealed by financial statements influence the trend (e.g., analyst opinions, social media, macro events, institutional money flow)
- Price movement and fundamentals are increasingly out of sync
So what can active managers do to achieve superior results?
Return Dispersion Is a Good Place to Start
Return dispersion is the cross-sectional variation in returns across a universe of securities over a given time period. The following charts show how return dispersion works across world markets in all types of market conditions.
The empirical evidence is irrefutable: markets exhibit dispersion in returns in all market phases.
So How Can Fund Managers Profit From Return Dispersion?
Capturing price trends more consistently is key. To do this, managers must:
- Identify the direction of the trend.
- Quantify the strength of the trend.
- Measure the quality of the trend.
Active managers must be able to do all three of these things accurately, consistently and repeatably — no matter the market cycle.
If your investment process underperforms when capturing trends, DIH may be able to help.
DIH is pleased to announce its recent partnership with Trendrating, a market-leading provider of analytics and technology for professional equity investors, to offer the company’s trend capture ratings data and analytics, which dove-tail neatly with DIH’s existing data offering. Portfolio managers and quantitative analysts can now add a robust methodology to rate price trends, validate investment ideas, improve risk controls and capture additional alpha. Over 100 asset managers around the world benefit from these analytics every day.
If you’d like more details on Trend Capture Analytics and how it can improve your investment process, please contact us.
Also, you can connect with us on LinkedIn and Twitter.
Stay Healthy. Stay Safe.