NN IP Expands Data Horizons
Dutch fund manager goes beyond traditional economic numbers.
Dutch fund manager NN Investment Partners has found significant added value in using online pricing data to help identify changes in the inflation momentum ahead of the publication of official statistics.
NNIP began thinking about whether social media, artificial intelligence and big data had a place in its investment process in 2009. The Dutch fund manager partnered with MarketPsych, an independent consultancy that develops financial applications from behavioral economics, and after testing the use of sentiment analysis in its investment process in 2013 found that it had predictive value.
Pieter Jansen, senior strategist multi asset at NN Investment Partners, told Markets media: “We use online pricing to help identify changes in the inflation momentum as a leading indicator for official inflation data.”
For example, after the UK voted to leave the European Union in June last year there was a sharp drop in the level of the pound.
“Online prices immediately increased but have recently fallen back,” added Jansen.”The signal from online prices contributed to an overweight inflation-linked bonds (relative to nominals) but we turned the trade around after inflation expectations had sharply increased.”
In addition to using big data, NN IP bases its top-down multi-asset strategy on a combination of fundamental and behavioural analysis, through incorporating investor emotion and behaviour from digital news channels such as financially oriented news platforms, blogs and social media. A proprietary toolkit provides data for assessing markets which strategists and portfolio managers can use with their own research to form views.
“We are always working on improving our investment process and searching for new data and drivers is an important element of this,” said Jansen. “You cannot stand still.”
NN Investment Partners, formerly known as ING Investment Management, is part of NN Group a publicly traded company listed on Euronext Amsterdam. NN IP managed approximately €245bn ($280bn) in assets at the end of June 2017 for institutions and retail investors.
In fixed income the manager has measured the spread block. which combines spread levels across investment grade, high-yield and emerging markets, against Emotion Social which captures sentiment such as joy, stress and anger from social media.
Jansen added: “We have seen that spread block and emotion move in parallel when there are big shocks in the market such as the emerging market volatility in 2015/16. Therefore sudden moves in the social data provides us with a signal for a tactical decision.”
For example, at the end of September this year, NN IP added to its US dollar investment grade position (to overweight), as the manager saw an increase in market behavior and social media indicators related to anticipation and news coverage of potential US tax reform. Jansen continued that uncertainty signals from both social media and traditional media react in the same way as yields during big shocks.
“There is significant added value in used these data rather than only relying on traditional economic data,” he added. “It is important to have both.”
Valentijn van Nieuwenhuijzen, chief investment officer at NN Investment Partners, said at a media briefing last week: “Metrics on sentiment, investor emotion, herding behaviour, liquidity conditions and positioning help us to reach this conclusion, but the simplest explanation is that there are still no clear signs of exuberance or excessive optimism in markets.”
Equities are NN IP’s preferred asset class for 2018. van Nieuwenhuijzen said the fundamental backdrop for equity markets is the best the firm has seen in years, with strong macroeconomic data and double-digit earnings growth both this and next year. At the same time, low inflation numbers will prevent any rapid tightening of monetary policy.
Jansen said the outlook for fixed income looks challenging at first sight. The pace of monetary policy normalisation and the rise in bond yields will largely determine the correction risk for fixed income spread products, like (high yield) corporate bonds and emerging market debt.
“We expect both to keep developing in a particularly gradual fashion,’ added Jansen. “Still, given the turning point in the monetary policy direction, tight valuations and weak liquidity, the risk of a temporary, moderate spread widening is material. Significant spread widening usually only happens in a risk-off environment and, given the positive fundamental backdrop, we do not expect this.”
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