Data can be useful, but it must be tamed first
I’m an investment manager, so I’ve always thought of data as my friend. How else do I make informed judgements? How can I test my theories and appraise my theses?
The huge boom in the amount of data available over the past two decades must surely present a great opportunity for investors. But how to tame the proliferation of information available, translating it from "big data" to investment insights?
Many of the large fund managers have tried to answer this challenge by investing in teams of data scientists. Our own team, at Schroders, includes two members hired from the McLaren Formula 1 team. And they’ve delivered some fascinating insights.
One example used natural language processing, a machine-learning technique, to analyse content and cluster similar semantics, allowing our global equity team to spot patterns in Mark Zuckerberg’s public comments and reduce exposure to Facebook ahead of the Cambridge Analytica scandal.
Another example used geo-data to analyse the number of William Hill betting shops that would need to close should the betting regulation change: the analysis predicted 929; the company eventually announced 900. These insights can clearly deliver real value to investors; but context is key.
I have two examples of the dangers of over-reliance on data. The first comes from my summer reading, Invisible Women by Caroline Criado Perez. She talks about the increasing use of algorithms and machine learning based on big data, but finds that many of the large datasets are gender-biased.
For example, a University of Washington study found Google Images under-represented women across the 45 professions that were tested, with the largest discrepancy at chief executive (11 per cent of the images, but 27 per cent of chief executives in reality).
Google Translate will also convert gender-neutral Turkish sentences such as "O bir doctor" (s/he is a doctor) into the gender stereotypical "he is a doctor", with the reverse effect for a nurse. Algorithms often amplify this bias, and it’s not difficult to imagine how this could disadvantage women. Unconscious bias in artificial intelligence could well prove to be as prolific as in humans.
My second example of flawed data is the use of environmental, social and governance ratings to construct responsible investment portfolios.
These ratings, compiled by agencies, are backward-looking and based on tick-box questionnaires. Our analysis, however, suggests ESG ratings have no clear predictive value, with better-rated companies slightly more likely to experience controversies than worse-rated ones.
There is also a lack of consistency between agencies, with less than a 15 per cent chance that the same company would get the same rating across the three major ESG rating providers.
So although I believe passionately that data provides opportunities for better decision-making, I come back to the need to own the analysis and fully understand the data.
The old adage of "garbage in, garbage out" holds true: we are unlikely to get great insight if our data inputs are flawed. And I believe that good investment decisions come from a depth of understanding supported by rigorous, forward-looking research.
This article first appeared in Third Sector
Co-head of Charities
Kate specialises in investment on behalf of charities, endowments and foundations and has over 20 years of experience, with 15 years at Schroders and Cazenove. She is a CFA charterholder and has a BSc (Hons) in Natural Sciences from the University of Durham, is Chair of her local community foundation, Vice-Chair of her local primary school and Chair of the Finance Committee of the Cripplegate Foundation. She won a Women in Investment Award for her work with the Charity Commission and FCA creating a new charity investment vehicle.
She has researched and co-authored a series of publications on Charity investment best practise including 'For Good and Not For Keeps', which examines sustainable expenditure, ‘Intentional Investing’, which researches how charities can align their investment policy with their aims as an organisation, and more recently ‘Time and Money’, which explores how charities can make the best use of longevity. Kate was chair of the Charity Investors' Group for 12 years, standing down in 2019. In this role she collaborated with CFG and authored a guide to written investment policies. Kate also regularly writes on charity investment in the charity sector press.
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