Author: Trendrating – trendrating.com
In an investment environment characterized by volatility and an overload of noise, investment managers are under increasing pressure to deliver results that outperform the market. When you look at 2020 investment performance, open-end funds had the worst track record in recent memory losing $317 billion in outflows. At the same time, exchange traded funds (ETFs) earned $313 billion, which represents the widest disparity between the two types of asset flows since 1993 according to Morningstar. To improve portfolio performance, mutual fund managers need to develop credible strategies to start delivering value for assets under management. They need to refocus their attention on market trends.
To make better-informed trading decisions and increase alpha, active managers need new tools and new models that help them make better-informed investment decisions to profit from performance dispersion and yield higher returns. The goal of any active manager is to beat the market benchmarks and adopting new tools such as the advanced analytics to track trend pricing developed by Trendrating can be a game-changer when it comes to beating the benchmarks.
Recognizing the Changes in Market Mechanics
Investments underwent a transformation in 2020. While the world was dealing with the COVID-19 pandemic we also saw one of the fastest bear markets on record. At the same time, we saw a record $120 trillion in stocks trading on U.S. exchanges in 2020, which is a 50 percent increase over 2019. The Russell 3000 Index also reports a boom in average daily share volume jumping 49 percent to an average of 12.9 million shares daily.
Retail traders are helping to drive trading volume and having more of an influence on market price trends. With more retail investors quarantined at home during the pandemic, a record 8 million people opened new accounts in the first nine months of 2020. According to Bloomberg, retail traders now make up one-fifth of U.S. stock volume with accounts scattered across brokerages such as E*Trade Financial, Ameritrade, Charles Schwab Corp., TD Ameritrade Holding Corp., Robinhood Markets, Inc., and other brokerages offering some form of free trading.
According to Bloomberg Intelligence, the only groups that have more impact on price trends are market makers and high-frequency traders. Small investors and amateur day traders have been blamed for inflating the value of companies in trouble, such as Hertz Global Holdings. They also have made it impossible to accurately price IPOs such as Tesla and Airbnb. Bloomberg quotes Gary Dugan, CEO at the Global CIO Office, as observing “The rise of the retail investors has exacerbated the phenomenon of momentum trading. Once a stock gets a following, it tends to drive it to exaggerated levels purely because investors only react to price action not the fundamentals of the company.”
How can active managers thrive in such an environment? Investment decision-making processes have remained unchanged for decades and most of the traditional indicators are proving too erratic, especially with the influence of factors such as retail investors. It’s time that active managers start analyzing price trends.
Capture Price Trends to Beat the Benchmark
To beat the market benchmarks and start increasing alpha, mutual fund and asset managers have to rely less on underlying fundamentals such as revenues, earnings, return on equity, and PE ratios and start paying closer attention to price trends. Trendrating helps managers get the trend allocation right and beat the index performance.
To capture the best opportunities and profit from price trends, asset managers need to be able to evaluate actual price developments. Performance dispersion is a constant phenomenon and identifying big money flow in and out of stocks and quickly confirming pricing trends makes it easier to capture uptrends and avoid downtrends before you lose profits. However, you need the right analytic tools and methodologies, since fundamentals and analyst opinions don’t always map to price trends.
Trendrating has developed a methodology for active managers to measure the portfolio exposure in stocks in a uptrends (A,B rated) versus securities in a downtrend (C,D) called the Trend Capture Rating (TCR). TCR provides a clear analysis of a portfolio to uncover the quality of a portfolio’s trend allocation across actual medium term trends with tools to optimize the exposure for better returns. Comparing the TCR of the portfolio against the TCR of the benchmark provides predictive intelligence about the probability to outperform the index. The problem with most underperforming portfolios is that contain an inferior trend allocation versus the index. For example, if the portfolio TCR is “B -”,while the benchmark TCR is “B +”, you need to examine the underlying holdings to find out why. If my portfolio is holding 30% or greater of “C” and “D” rated stocks, while the benchmark contains only 15%, then the probability for the active portfolio to beat the benchmark is little to none. By raising the TCR of the portfolio to “B+” or higher via an allocation more in synch with positive trends the chances to outperform substantially increase. Adding TCR to any portfolio can remarkably improve the performance of fundamental-driven investment strategies by combining good fundamentals with the confirmation of price action
As markets become more complex, trends tend to be driven by money flow, which isn’t accurately reflected by fundamental data. Adding “trend valuation” data as another layer of intelligence helps validate investment ideas and control risk, making it easier to beat the market benchmark.
Rating trends can be a powerful complement to any portfolio strategy, reducing the risk to underperform. For example, you can use trend analysis to identify and test new investment ideas, to complement fundamental metrics, and to rate stock sectors and markets. Tracking price trends also can improve risk management by revealing reversals to limit exposure. You can even use TCRs as another layer of risk control across portfolios.
The beauty of the Trendrating Model is that it can qualify and measure price trends across market cycles and a broad universe of stocks with reasonable accuracy. Trendrating fills the gap in market and portfolio intelligence, as successfully navigating trends is key to deliver superior, consistent returns, giving portfolio managers and active traders the insight they need to outperform the market benchmarks. The news should be a welcome relief to professional investors around the world.