Most financial advisors and individual investors judge the worth of investment vehicles solely by their performance. There’s not much else to go on, after all, said Clare Flynn Levy, founder and CEO of London-based Essentia Analytics, a software company specializing in behavioral finance.
However, few realize that those performance figures—the outcome of investment decisions taken by portfolio managers—are also a measure of their skills. The better a skill set a portfolio manager has, Flynn Levy said, the better he or she will able to do what they need to do, and this will in turn have a positive impact on their particular fund’s performance.
Few, however, are aware of the importance of skill, and that includes many fund managers themselves.
“At the end of the day, when you’re judged solely on performance, it’s very difficult to maximize your skills,” she said. “And since fund managers are constantly being inundated with new information, they don’t have enough time to digest it all and much less time to look backwards, measure their success and learn from their failings. If you believe, as I do, that there is any skill in fund management, then it’s extremely important to measure that and to be able to maximize it.”
Flynn-Levy, who formerly managed institutional money for a number of large firms including Deutsche Asset Management, set up Essentia Analytics to provide fund managers with a toolbox that does just that. The company’s proprietary cloud-based software seeks to empower portfolio managers—who, she said, are “selling skills but getting paid for performance”—by measuring how, why and when they do what they do. The decision support software enables fund managers to capture richer data about their own behavior and how it affects the decisions they make. It measures every aspect of their investment process, tracks their productivity, their time management and their decision-making processes, with the goal of providing a fund manager with an overall, holistic picture of himself or herself.
The software is built on a simple data in/data out principle. It collects all manner of information about an investment manager: their investment decisions and the context in which these are made, Flynn-Levy said. It uses a range of data, from trades a manager made and particular market contexts in which he or she made them, to the physical contexts in which a particular manager took investment decisions, and the state they were in when they made the decisions, including their energy, emotional and even their hunger levels.
“We feed everything into a big pot and analyze it, looking for certain behavioral patterns,” she said.