Data mining gives fund managers the edge in trend spotting

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When R&B star Pharrell Williams’ hit ‘Happy’ reached number one for a third time in the UK this year – the first song to do so in 57 years – it piqued the interest of some fund managers.

It may not be the most conventional piece of information to back up a trading position, but used in conjunction with more orthodox ways of telling when an economy is on the mend, it helped underline the improving sentiment among consumers.

Other trends to support the view that people are more content with their lot, and therefore the economy is heating up nicely, include the increasing number of colourful cars on the road. At the height of the financial crisis, more people were choosing black. Now as their moods lighten, they are more inclined to pick a cheerful yellow.

The tracking of number one tunes and the colour of people’s cars highlights how some fund managers have become more innovative in the way they are data digging or data mining to help them gain an edge on rivals.

In the past, spotting a trend such as the rising number of colourful cars on the road was done anecdotally. Now, with Google search engines and Twitter search feeds, it is possible to establish these trends with the use of data.

Spotting these trends, which may encourage a manager to buy stocks that benefit from a growing economy, is only one part of the story. The old ways of stock selection by analysing company results and meeting chief executives still matter and arguably always will.

But to make a difference in active management, it has become more important to utilise the proliferation of information on the web. A senior executive at a big asset management group told me recently that his firm had become more like a technology company because of the amount of data it stored to help stock selection and the creation of portfolios.

If Google decided to branch out into asset management, they would be a force to be reckoned with because of the size of their database.

Other companies, such as retailer Tesco, could in theory also use their database to help spot consumer trends that would be invaluable to asset managers.

The senior executive thinks this may mean the end of the old fashioned portfolio managers as a new breed of mathematically oriented successors replace them.

“There is just so much you can do with data,” he said. “In the old days, you did not have the information, but now if you are clever you can select the right data to give you a much fuller picture of what is going on in the economy and the world. It is very exciting.”

Other investment groups are marrying behavioural finance with data digging to try to improve stock selection and asset choices further. Being able to empirically establish the increasing number of colourful cars on the road is an example of this.In other words, some asset managers are using data to understand socio-economic patterns that in turn help them pick stocks.

In journalism, data digging or data mining has become more important, too. Elegant writing still matters at the Financial Times, but there is a growing pressure on reporters to find statistics and data that provide readers with more insight.

It is like a second industrial revolution for many businesses, but in technology. This observation may not be particularly new as the web and advances in technology have been with us for a decade or more, but it does seem that in the past two years or so this realisation of the importance of data gathering has started to hit home in more profound ways.

It will be interesting to see if these technological advances translate into higher returns for some investors – or in journalism whether it will help reporters produce better and more informed stories.

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