In today’s competitive financial markets, asset managers are increasingly under pressure to improve their investment processes and deliver alpha. This case study outlines how 162Labs can help bolster the investment decision making process for asset managers.

Problem

A New York based asset manager with over $1Bn in AUM was facing difficulties regarding its investment process:

The investment team had a number of stocks they wanted to invest in, but there was no clear way to decide which stock(s) in the existing portfolio they would sell to free up capital for additional investments.

As high-conviction asset managers, they had performed poorly in the past when there was discrepancy among the investment team members in the level of conviction for each idea. The investment team wondered how they can improve their investment process over time.

Upon further investigation, we found that all of these difficulties arise from not having a systematic investment evaluation process. Each member in the investment team had his/her own way of analyzing stocks and markets, based on different datasets that were often incorrect or outdated. It was especially difficult for members to follow each other’s thought process when each member uses a different evaluation method for each stock. The lack of consistency in the investment process also led to not having a concrete base that could be improved over time.

Solution

The asset manager’s investment team and 162Labs agreed that moving towards a more systematic approach to evaluating investment ideas was critical to the asset manager’s future success as it would provide consistency, transparency, and opportunities to improve the investment process. As a first step towards this, we determined to build a customized stock reporting tool that outlines the relevant investment decision criteria.

162Labs interviewed each of the fund’s investment team members, facilitating discussions to establish a common set of criteria to be used as a basis for investment decision making. Based on these investment decision criteria, 162Labs created a customized database to house all relevant financial raw data, which were subsequently cleaned and synthesized by 162Labs’s proprietary software to produce a customized dataset. This database would be updated daily to provide the latest financial data in the market to the investment team.

With this new centralized database, we were able to create customized financial summaries for every stock in the fund’s portfolio. The summaries contained key financial and valuation metrics, a five-year relative performance graph to the benchmark, one-year stock graphs, and a competitor comparison table.

These summaries drove efficiency at investment meetings, as they provided consistency and discipline in investment actions, as well as transparency in discussions by creating an objective basis for comparison of potential investments. Further, the systematic approach to investing provided opportunities for the asset manager to improve its investment process over time, as the fund could identify which investment decision criteria should be added or removed.