In today’s digital age, investing has been made very simple. You don't have to pick a single stock anymore but rather now you have the ‘smallcase’ app to invest in ideas and diversify your portfolios by buying a basket of stocks.
Smallcases are model portfolios of stocks/ETFs based on a theme, idea, or strategy. It is a modern investment instrument for investors to build long-term diversified portfolios.
Smallcases are created by SEBI-registered professionals. Smallcases have brought a lot of flavour to investing as they are created across various strategies, market segments, sectors, and risk profiles.
Times haven’t always been this easy. It is with technology that today’s retail investors have got more control on their investments, thanks to technology.
Today anyone can invest through the touch of a button on their mobile phone. If this has been the journey so far then what would the journey ahead look like?
In an interview, conducted by smallcase, Abhishek Banerjee, Founder, and CEO of LotusDew, and Rahul Bakshi, Deputy General Manager of 21G Investments share their valuable views on “The Power of Technology in Investing.”
Before starting with the interview, Abhishek Banerjee makes a point. He says one can argue that essentially there are two ways to make money in the market. Either you know something better or faster than the rest of the market.
Fundamental analysis is knowing about something better but quant involves knowing better and faster. In quant, there are many areas of research.
Even passive investing is quant as not all indices can be fully replicated hence, quantitative finance is used to mirror the returns of the index. Quant is also used in hedging and transition management.
Q) So Abhishek, how does today’s technology actually help in finding better fundamental data or quantitative research?
A) “Most of us know that quant from an investing point of view. Developing on knowing something better, one can go upstream in data collection when trying to know better using quantitative research.
For example, can we look at satellite images of crops to estimate the quality of yield? Can we look at the sinking depth of ships to estimate crude shipments?
Can we count cars in parking lots to estimate shopping in malls? These are some of the ideas that are widely adopted but were cutting edge even 10 years ago. The state of play now seems to be more about using AI/ML in the context of unstructured data to extract intelligence out of it.
For example, at Lotusdew, we look at board compositions of listed companies and try to map them to their past work history, other board representations, and professional affiliations to calculate a composite score.This is used to screen for corporate governance standards. We look for various factors like similar last names, gender, and size as other important considerations.
We think governance is always top-down, so a professional and independent board will always bode well for investors.
Q) That’s quite interesting. Are there any other ways Technology can help in finding additional factors that can be added to Quantitative Research?
A) There are other paradigms of quantitative investing. Broadly they lie in the domain of momentum, value, volatility, and growth as main factors. One may use quantitative data to rank companies on these parameters.
One of the most influential pieces of research on momentum was done in 1993, and most of them off-the-shelf research does not work well anymore. So, it cannot be as simple as using public references to make it work.
New research is needed to keep an edge in the market. The question is are these still state of the art or are we relying on research that was developed 30 years ago.
Also, if you look at smart beta, their promise of cheap alpha has been delivered as cheap but in many cases negative alpha. This goes on to show that markets don't care about any formula.
This is the issue faced by people who come from accounting or scientific backgrounds as there is usually a closed-form solution in these domains.
However, markets have continuously taught participants that there is rarely a sustainable formula that will deliver a continuous money stream.
Q) Then there is no hope then?
A) There is. This is where technology is a useful friend to finance. Technology allows unbiased probing of the market and when applied to experience it can generate structural advantages for a manager.
Q) How does LotusDew make use of technology for their research?
A) As explained, technology is a key ingredient in quant investing. We at Lotusdew for example, start right at the data collection. We think our data set is unique and we source data directly from regulatory disclosures around the world using advanced machine reading technologies using which we keep a clean copy in our data lake.
This data cannot be purchased and as we build it ourselves, we aim to be the first to know. Fundamentally, we broadly use big data to connect disparate data sources into one representation of the truth.
For example, we link people on the board to university rankings, transparency rankings, and cross-border organizations that provide reputation alignment.
Over the next decade, technology will do most of the heavy lifting and information asymmetry will reduce. This means markets will move more towards being a strong market and weak markets will move towards higher-frequency trading. That means, for an average individual investor, they need to move towards systematically managed portfolios - both domestically and internationally.
The Lotusdew Listed Venture Capital offers one such opportunity for investors to get managed portfolios that aim to deliver long-term wealth creation.
The strategy uses AI(Artificial Intelligence) to evaluate corporate governance standards using proprietary data and balance sheet data to identify very small listed companies that can offer VC(Venture capital) like upside for individual investors who don't have the means to access an AIF (Alternative Investment Funds).
This is perhaps the only way a retail investor can have a VC-like allocation in their portfolio.
Q) This question is for you Rahul. What do you think about the investment habits of today’s modern investors?
A) Disruption sets forth the onset for all progressions and the Investment industry is not untouched by one. With the ever-changing market dynamics, a retail investor thinks a lot more adaptively and comprehensively today.
Can’t blame him, after all it is his millennial generation thought process and new technological influence which has shifted his “will” to adapt to a ‘Modern’ or formal advice for his Investments.
And this shift did not come overnight, the evolution is corroborated by intelligent standards and expectations set in his mind to look for the best research-oriented advice.
He understands that Investing is not just traditional buying or selling of stocks with the price movements but instead it is an Intelligent holistic strategic process including hedging (Risk cover) to seek downside protection.
Q) What do you think actually lead to this and how can this help the everyday citizens to invest better?
A) “Awakening to this “Investment Wisdom” took time, especially after the Gen Y investors' exposure to digital platforms in the late 90’s, and today's access to social media (Google, Facebook) with smartphones and other digital devices, they are able to access the information from anywhere and anyhow.
They now have access to several advisory models where they can compare the advisor’s profiles, their historical performance charts, and investment strategies.
One reason why the investors are shifting towards advice-based investing is that they are already occupied with daily official and home chores and other obligations so much, that uncertainty and complications of dealing with their own investments will kaput any good if not bad.
Especially, when they have multiple goals to address (Paying off loans, children’s education, future retirement, buying assets, healthcare and taking care of dependent parents, etc.).
A serious goals-based and performance-driven advice after a thorough risk profile assessment is a must. Risk profiling is a unique financial assessment questionnaire for any consumer which gives a fair idea of his current liabilities, his income group, and his risk-taking capability in the Market.
Believe it or not, many investors knowingly overlook this part and fail miserably managing their Investments. Factors such as low existing interest rates, low inflation rates, slow economic growth rate (post-COVID), and high market volatility make it harder for the retail investor to deep dive alone.”
Q) How do you think technology can change the way we invest?
A) “With the onset of the IT revolution, technology-aided computer-based trading viz algorithmic trading (AT) and high-frequency trading (HFT) have become important attributes of financial markets.
These are backed by complex algorithms based on the client’s survey data to produce customized financial plans and asset allocation.
This is an example of an advice shift from human-based to science-based model-driven and attracts investors who are technology-savvy. This will certainly throw a challenge to the traditional incumbent wealth managers, but will it completely displace human-based advice is one question. The best model will find a blend of both science and human-based advice.
Human-based advice (RIA, WM): With the help of his experience and research aptitude, the advisor is capable of creating sophisticated research and modeling capabilities to maneuver market risks at bad times to much extent.
Much of the investment portfolios managed by advisors have some part of debt attached for hedging and risk management. An adept advisor will proactively Rebalance his portfolio timely and work towards better performance.
Big Data analytics is another prospect whose potential has not been unleashed fully, but as volumes of consumer data continue to grow exponentially, much of the analytical capability could unleash advice and portfolio construction, doing risk management to monitor analytically. This will benefit all parties including advisors, clients and regulators.
• Big Data analytics can leverage client surveys and other information to create customizable portfolios.
• It can measure a client's inclination to buy various funds of types of advice.
• Evaluate client’s lifetime value
• Will help determine client true risk tolerance.
• Help Rebalance client’s portfolios in real-time and generate real-time investment ideas based on client preference and market events.
Q) Taking all of this into context, how do you think Technology has ultimately benefited the average retail investor?
A) “Time has changed over the years in terms of advice-based investing. Now “Financial Advice” is no longer limited to the wealthy attributed investor alone!
One classic example is the digital platform “smallcase” which supports broker integration where the investor can simply look for the ‘Model’ advice-based portfolios and pay nominal subscription fees.
Investors exactly know the stocks, their quantity, and price while investing. This freedom of owning research-based advised stocks directly in their broker account has empowered the retail investor to take full advantage and not worry about the bigger investment ticket sizes. Not forgetting the dividends that flow in!
You can find, 21G Dark Horse smallcase here.
(This is a partnered post)
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