Few investors would disagree that it is becoming increasingly hard to gain a competitive advantage in the investment world.
Technology has made information much more readily available, and any new piece of information gets arbitraged away fairly quickly. Even reliable signals such as sell-side analysts’ upgrades or downgrades get priced into the market within 30 seconds of their release. As a consequence, anyone trying to use publicly available information to make a decision is probably too late, as it will have already been factored into the price.
In response, fund managers are adapting and seeking new sources to try to gain an edge. They’re tapping into expert networks, for example, where they can download information and insights from industry ‘experts’ including former senior executives. Technology itself is also providing another new type of edge. For example, some research firms are offering images of retailer’s car parks to create a picture of how busy shops are.
The problem is that many of these new, so-called edges are available to everyone, at a price. They are not proprietary and therefore become quickly adopted, thus diluting the advantage they provide.
In seeking out new ways to generate unique information and insights, some savvy fund managers are turning to hiring journalists, who are skilled in uncovering hidden information and looking at publicly available information from a different perspective, in order to find a true proprietary edge in an increasingly competitive marketplace.
Overcoming behavioural biases
Journalists will never replace traditional fundamental analysts, but they provide fund managers with a view from a different angle. By using different sources, investment decision making can be made more objective.
Importantly, a journalist’s input can help address common behavioural biases. Portfolio managers are often former sector specialists, and this can mean that they retain a preference for that sector.
More specifically, journalists bring the following skills and traits to investment research:
1. Different research
Journalists tend to be a bit more resourceful when looking for information. They won’t just be relying on typical channels that a research analyst will try to tap into such as management and experts. Journalists use ‘shoe leather’ research – non-desk research where they go out into the world and talk to people. They can reach out to customers, ex-employers and even ex-CFOs: anyone who can give them a more rounded view of a particular issue.
2. A generalist view
As mentioned, often the portfolio manager used to be a specialist. Typically, they prefer sectors that they may know well. Those sectors can be a comfort zone and they may not be as open to different opinions.
Journalists’ knowledge can be quite broad. The don’t need to be sector specialists. They typically can grab onto issues and find out what’s important fairly quickly.
3. Big picture perspective
While many portfolio managers and analysts can get caught up in the minutiae of company fundamentals, journalists can bring a broader, ‘thematic’ industry or sector-wide perspective.
Analysts typically go straight to companies, but journalists try and get a bigger picture perspective. They can step back, speak with many different sources and weave it into a larger narrative. They may, for example, look at the banking sector and consider what everyone in the industry is doing, rather than just focusing on one bank.
Journalists can be more receptive to interesting projects and different types of research. They are used to being thrown a different topic on a daily basis and asked to chase it down to find an angle or important lead they can write about.
Journalists typically are able to discern the key issues relatively quickly. They are used to working to tight deadlines, even on major investigative projects where editors demand a result sooner rather than later to conserve limited resources.
Journalists have probably faced a lot of rejection in their jobs - which makes them persistent. They can latch onto a small piece of information and dig deeper and deeper. Analysts, on the other hand, are more likely to wait for management to come to them with information rather than chase hard for information.
7. Unique sources
The best investigative journalists have their own sources of information. That includes industry and company contacts they have built trust with over many years; but also databases and information that few people know about or don’t know how to access.
Deploying a journalist
Fund managers can deploy these skills for industry and company-level research.
For example, a fund manager might want to understand the impact of the arrival of Amazon on local retailers. They might want to find out what retailers are doing in response to survive in this new competitive environment. They may send the journalist into stores to talk to different customers and ask them why they shop there, want they do and don’t like, and how likely they are to shop online rather in the physical store. The journalist may also speak with other sources such as suppliers and regulators. But their research provides a broader, sector-wide perspective from a unique angle.
The fund manager may also use the journalist’s skills to delve into a specific company. A CFO might have left a healthcare company. Is it a standard career move or something more? The fund manager might want to find out if there are any cultural issues causing staff turnover that could point to more serious problems. Rather than just talking to management or the supply chain, the journalist is equipped to approach other recent employees of the company.
But using journalists doesn’t suit every fund manager’s research process. If they don’t know how to effectively use the journalist’s skills, hiring a journalist as a researcher can ultimately be as effective as reading a newspaper. The fund manager needs to be clear about what they want from the journalist.
Hedge funds hiring
While it is not yet a widespread trend in Australia, there are reports in the US that hedge funds are hiring reporters and even advertising on journalism jobs boards.
With gaining an edge becoming increasingly challenging, savvy local fund managers who recognise that there is more than one way to skin a cat, and who want a unique research angle, could look to harness the power of the press for their own benefit.
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