Putting Big Data to Work

Disciplined Equity

Putting Big Data to Work

Podcast

The big themes coloring the economic, political, and financial environment are by now familiar—low growth, low rates, and low volatility, paired with high valuations and a high degree of uncertainty. This occurs against a backdrop of anxiety about technological change in the broader economy (the “rise of the robots”) and the ongoing transformation of the asset management industry itself. We aim to provide greater context around these issues.

Innovation in the Financial Services Industry

Elsewhere in this edition of CIO Insights, we attempted to debunk the argument that the so-called “rise of the robots” was going to render humans jobless and obsolete; instead, we argue that technological change is crucial to improving outcomes in many aspects of life, and that we would all benefit from more innovation rather than less. Here, we hope to demonstrate ways in which technological changes have improved outcomes in the financial services industry in general and translate to our investment process in particular.

Technological change has been a profound benefit to investors overall and in our process specifically.

In the area of asset management alone, individual investors have benefited from the proliferation of low-cost brokerages and investment strategies. Furthermore management fees have come down significantly over time, particularly in the last decade or so as the ease of trading and availability of information increase competition in the industry. The entire phenomenon of passive investing—born in the 1970s with the personal computer—rests on computational power. Index-based approaches require complicated index replication and optimization techniques, and benefit from the highly efficient market trading made possible only by an exceptional degree of automation.

Automation in Our Process—An Example

An example of technology at work in our own process relates to how we manage and utilize “unstructured data,” which we define as information that doesn’t come perfectly arranged on a spreadsheet. For example, there’s a tremendous amount of data in press releases and corporate earnings calls that is plain text, as opposed to sales figures and earnings projections and things that are very easily and clearly quantifiable. Our belief is that there’s a great deal of investible information in the dialogue and tone around these calls, giving us greater insight into a stock’s potential performance.

How much data are we talking about? One data set we work with is roughly equivalent in size to all the words in Wikipedia. Another project uses a data set many, many times larger. For us to use this data effectively, we rely heavily on automated processes to structure and interpret this information.

Here we veer into the lane of the traditional fundamental analyst, who evaluates the management call and relevant data for the companies they cover and forms some sort of qualitative judgement about each company. In contrast, our automated process allows us to systematically evaluate every earnings call for 3000+ companies simultaneously across a broad sweep of metrics.

Technological change has been a profound benefit to investors overall and in our process specifically. No matter the economic and political environment, adhering to a financial plan and well-defined process is vastly preferable to (over)reacting to every headline. Ultimately, we believe that the best way to achieve financial goals is to rely on a process that is objective, systematic, and disciplined.

More from our chief investment officers.

The opinions expressed are those of Vinod Chandrashekaran, Ph.D., and are no guarantee of the future performance of any American Century Investments portfolio.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.