Looking beyond the dramatic headline
29 October 2018
Sifting through the market and media noise to determine what’s true and what’s not has become a bigger part of the investment environment, says David Jane of the Miton multi-asset team
One of the biggest challenges we face as investors is trying to determine what information is relevant and what’s opinion, speculation or worse.
Over the past few years, most likely because of improved communication tools, the amount of information available to investors and the ease of gathering it has improved greatly. In the past, the investment banking industry and the financial media built businesses that could profit from gathering information and passing it on in a succinct or digestible form. However, as this information can now be so readily accessed, this business model had to change. Now information is often packaged with high levels of opinion or noise to gain attention.
Every day there are headlines using emotive language. One recent example was ‘Pound sterling slumps as Theresa May admits ‘impasse’ in Brexit negotiations’, a headline clearly designed to attract or even disturb readers. Perhaps a more accurate headline ‘Sterling unchanged on week’ would not sell any newspapers.
Our challenge is to sift for the truth beneath the noise. We aim to focus on the data and try very hard not to be influenced by the emotional overlay that quite often cloaks the data. This noise is important however, as it helps us understand the market narrative. Returning to the earlier example, for an extended period the narrative around sterling has been negative, focussing on the Brexit negotiations and domestic economic weakness. Clearly being negative on sterling has been a popular trade.
A successful approach is to monitor news sources with different biases, either politically, from the left or the right, or perhaps more importantly from different regions. Rather than focus on media published locally, one benefit of technology is we can easily access sources from across the world, such as Asia and the Americas, to get both sides of globally important stories.
A further effect of new media is that, unless we actively avoid it, we will only receive information that reinforces existing biases, often the same opinion or information repeated ad nauseam. Behavioural finance teaches both that too much information is bad, so we seek out only relevant information, and to avoid anchoring we must seek conflicting information, an ever-greater challenge in today’s world.
At a more granular level, the same has been happening with equity research. Historically large investment banks produced equity research primarily as a means of driving revenue from the corporates they wrote on, with research payments from investors as a useful additional revenue stream. Post MiFID II, there is even less incentive for investment banks to produce unbiased research, given the institutions are to the greatest part paying for research out of their revenues and, hence, paying considerably less than in the past. Therefore, primarily positive research is written, and contrarian views are unlikely to be rewarded, meaning there is even less value produced by traditional brokers.
Even among the independent research providers, the incentive to produce dramatic headlines has increased, as their revenues have also been under pressure as active managers’ research budgets have shrunk post MiFID.
We have always been very selective in the sources we use and careful to recognise the biases of each source. Over time, we see the post-truth market as an opportunity, as increasing inefficiency should mean the opportunity for genuinely active managers increases, so long as they are able to sift the substance from the noise.
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