Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 365

Six types of big data are unlocking real insights

The use of big data in investment management has been revolutionary, but harnessing its potential is the next big challenge for the active asset management industry. Big data is the residue of information that we all leave behind as we buy things, sell things, browse the internet, use our smartphones and generally live our lives. Alpha, or excess returns, is not in the data itself, it is in how data is processed and creatively interrogated. Big data without data science lacks any power in uncovering insights that can deliver real alpha.

It all depends how the data is used

Despite the buzz that big data is generating within the research-driven world of finance and investment, achieving an integrated approach to using it is far from easy. Alternative data can be opaque or even misleading. Amid the hype, many will forget that big data is of little use without the combined insights of experienced data scientists and investment professionals.

So-called ‘big data’ is proliferating. At the same time, advances in cloud computing, machine learning and artificial intelligence allow extraction of coherent, strategic insights from these digital residues. Combined, as data science, they have the potential to be a richly-enhanced source of information about our world. It is information that is deeper and more detailed than we have ever had before, and yet also broader and more comprehensive.

In simple terms, data science potentially brings unique insights into the inner workings of a company under diligence. Most investors wait for quarterly earnings updates or an occasional meeting with an executive. Data science now enables tracking in near real-time the sales of a company and its competitors, the morale of its employees and their view of the CEO, how a new product launch is being received in a given market, research and development budgets, as well as numerous other key performance indicators.

These insights, sometimes unknown even to the company itself, give an advantage over the competition as they allow for a differentiated view of the company’s earnings power, or at the very least minimise impairment risk. Data science often provides insight into the operation of a business at a deeper level than is communicated more broadly, and in public reports.

Examples of big data opportunities

For example, credit card data is a popular form of alternative data but often it is used to infer total top line revenue in a quarter. This can contain significant bias and errors. Data science provides methods to detect and correct bias. In addition, statistical methods can be used to reveal demographics and psychographics in the data. Classifications of the data panel members by gender, age, urban density, income band, and buying preferences, etc. can be revealing about the cohorts and composition of the customer base and growth areas of a business. When evaluating a company it is important to know if the growth is from more customers, or from more loyalty spend by the same customers.

Online activity is another source of data science insight. Searching for something that a customer intends to buy is a leading indicator of the actual purchase. This leading indicator is particularly useful for higher cost items that are often considered for weeks before a purchase. Online transactions also provide insight into the competitive environment that the company of interest operates in, as well as a measure of the advertising spend in various channels.

Job listings provide a wealth of insight into the way that companies are growing, but this involves the use of data science methods to analyze the text of the job description. The descriptions show the areas and geographies where the company is growing, and within the text the company often signals the products from other business that they prefer to use.

Six categories of opportunities

Overall, many of the data science research hypotheses fall into one of the following six analytical categories:

Three years ago, we added a data science capability to its team of nearly 650 investment professionals. While many in the firm have come to quickly embrace data science, the recently-launched Global Equities Data-science Integrated strategy (or ‘GEDI’ for short) is the first to fully integrate data science with fundamental research and ESG engagement.


Register here to receive the Firstlinks weekly newsletter for free

Of course, different strategists working to different time horizons will make different buy and sell decisions, but whatever they do, they will now be informed, to a greater or lesser extent, by the additional depth and breadth that these data science insights bring.

State Super’s senior investment manager, Andrew Huang, said of these new data-based techniques:

“To us, Neuberger Berman appears to be meaningfully ahead of the curve in building and implementing this approach. We believe that supporting fundamental research with a solid data-science and ESG discipline will be a growing advantage over time”.

Data science is not a replacement for traditional investment research, but a complement that brings a fresh and sometimes counter-intuitive perspective. It is not a technology support function for investment professionals but an extension of what they already do. For the same reasons, simply hiring a team of data scientists and setting them to work is not necessarily going to enhance an investment manager’s search for alpha. Finding a common language with which to integrate that team into the existing research flow that investment teams generate is critical.

Ultimately, we believe those who engage with big data seriously and ethically will find it transformative.

 

Michael Recce is Chief Data Scientist at Neuberger Berman, a sponsor of Firstlinks. This material is provided for information purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. It does not consider the circumstances of any investor.

For more articles and papers by Neuberger Berman, please click here.

 

RELATED ARTICLES

Why is personal investing unlike other skills?

Five rules for a market professional's manifesto

Five lessons from football and investing

banner

Most viewed in recent weeks

A hard dose reality check on vaccines

With 160 programmes underway and billions of dollars spent on COVID-19 vaccines, investors are drawn to optimistic news. However, the company that has developed most new vaccines has a sober view.

After 30 years of investing, I prefer to skip this party

Eventually, prices become so extreme they bear no relationship to reality, and a bubble forms. I believe we are there today, not for all stocks but for many in the technology space.

How we have invested during COVID-19

With signs that the economic recession will not be as deep as first feared, many companies will emerge strongly with robust business models. Here are the sectors with the best opportunities.

Welcome to Firstlinks Edition 367

There is a similarity between the current health crisis and economic crises of the past. For COVID-19, record amounts of biotech funding from government agencies and private companies are looking for a vaccine. Likewise, central banks once struggled treating recessions but the 'vaccine' now is record amounts of financial stimulus to ensure liquidity. While the world awaits a COVID treatment, markets are purring along, at least until side effects hit.

  • 22 July 2020

Is the '4% rule' for retirement broken?

The traditional 4% rule was designed to ensure retirees do not run out of money, but low interest rates and expensive equity markets question the sustainability of the level. What are the alternatives?

Two great examples of why company management matters

It’s not only products and business models that create wealth. Management teams make decisions on how to deploy capital and such actions drive vastly different outcomes over time.

Latest Updates

Shares

How to handle the riskiest company results in history

It is better to miss a results bounce and buy after the company has delivered than it is to step on a landmine. With such uncertainty, avoid FOMO by following these result season investing tips.

Shares

The rise of Afterpay and emergence of a new business model

Sometimes the simplest ideas are the best. The founders of Afterpay stumbled on the attraction for consumers of paying by instalments, and now retailers must offer the facility or lose business.

Property

WFH and its impact on Australian offices and tenants

Although most office workers are currently WFH, an energy and a buzz comes from working in the same physical space. Other benefits include team building, relationships, talent mentoring and creative collaboration.

Fixed interest

Why 2020 has been the year of the bond market

Going back to June 2019, investors would have questioned the logic of diversifying away from outperforming growth assets. But when markets feel at their best, it is paramount to keep a perspective on long-term goals.

Investment strategies

Is 5G all hype or real investable opportunities?

While its impact will take time to unfold, 5G will meaningfully change the world. Once adoption takes hold, there is huge potential for its application across a wide range of industries.

Property

Australian house prices: Part 1, how worried should we be?

Three key indicators are useful for predicting the short-term outlook for house prices, although tighter lockdowns make the outlook gloomier. There is enough doubt to create cause for concern.

Property

Australian house prices: Part 2, the bigger picture

There is good reason to believe the negatives will continue to outweigh the positives over the next 12 to 18 months. There is more concern about house prices than the short-term indicators suggest.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.