How is the fund due diligence process affected by the current ‘data frenzy’ in the investment landscape?
Over the past two years, 90% of all the data ever generated in history, has been created. The emergence of these hoards of big data, has led to a data ‘arms race’ in the investment world. With asset managers spending tens of millions of dollars each year on new forms of data, many processes within the industry have had to evolve.
One of these is the fund due diligence process. With technologies such as computer vision capable of processing and analysing drone and satellite images faster than ever before, and natural language processing techniques transforming reams of CEO transcripts into potential predictors of alpha, new data sources are also emerging.
Signals are found in blogs that review employers’ management skills, in the analysis of corporates activity, regulatory disclosures or transaction data in a specific country or through sourcing different policy and labour costs globally.
But just as old and new big data may provide a better macro understanding of which companies or sectors are going to perform well over a given timeframe, it can also throw up spurious correlations between unrelated factors.
However, Anastasia Diangelaki, director at RBC Wealth Management says despite the enormous amount of data and new sources of data generated the premise of the due diligence on fund managers using data science in their processes stays the same as for other types of funds.
When selecting between a fund that uses sophisticated algorithms to filter companies and one that relies more on face-to-face meetings with companies, Diangelaki says it is all about understanding their “different shading risk and return source”.
She says: “We have even fundamental managers who are talking to CEOs and travelling, actually using the exact same data that these [databased] funds do as well. We might find that in a few years’ time it might be something commoditised – like when 20 or 30 years ago, having a Bloomberg screen was something extreme, but now it’s standard. So, we do see that filter through in other types of strategies as well.
“It’s the signal, it’s all about the efficacy of the signal and then how you incorporate that in your process.”
Petronella West, CEO at Investment Quorum agrees with Diangelaki on careful due diligence on databased funds, but adds that fund pickers and wealth managers should also remember that part of the due diligence process is about understanding the needs of the end client.
“It’s the signal, it’s all about the efficacy of the signal and then how you incorporate that in your process.”
Anastasia DiangelakiThis includes how to address themes such as big data when discussing with clients, and think about future generations and what big data will mean for them.
Petronella says: “Data is very useful in delivering information that wasn’t available at this speed before. So, there’s a place for all of it in today’s world, but I think in ten years [it will be] about how consumers will buy in the future, but it’s not us, it’s my kids. How will my kids buy in the future? Will they go to a financial adviser, will they just go straight online?”
She adds: “Kids gets excited about big data, I get excited about that stuff too, so [language] is the really key thing for me. We have to step away from this language that we use in financial services in order to really engage buy-in from a consumer.”.
EMERGING MARKETS SOPHISTICATION
In addition, the most profound implications of new datasets may ultimately prove to be in emerging markets with huge growth potential. Effective due diligence in gathering and analysing data from these regions may provide some of the biggest opportunities in coming years.
“There’s some extraordinary sophistication in emerging markets, and in some cases, such as payment processing and other payments system, they’ve leapfrogged developed regions,” says Brad Betts, managing director and data scientist at BlackRock. “There are times where there are data sources in emerging markets that we actually don’t have developed market analogues to.”
Unlike in the developed world, it’s not always possible to obtain the most useful data sources remotely. Betts confirms that BlackRock deploy a ‘boots on the ground’ approach. “I do think that sometimes, there’s an impression that you can just obtain data by just sitting at your desk,” he says. “But our team harness data in person and bring it back adding tremendous value that is very useful and effective in our firm.”
FUTURE IMPACTS
However, while more data offers more opportunities, it can also create new hurdles. Many fund managers are now finding that younger clients are expecting them to utilise the information at hand to conduct due diligence on the societal impact of how companies are generating their profit margins.
“The new generation are not only thinking about short-term financial returns but they also think about sustainability to a larger degree than maybe some other generations,” Weinberger says. “Over the last few years we’ve thought about how we can measure those dimensions to get a sense of which companies are doing more from a societal perspective. It’s important to our prospective end-clients and also ultimately it’s a measure of the quality of a company. If you have a long-term strategy, you need to face those questions.””
[1] Source: BlackRock, as at end 2017
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