Cross-Team Collaboration Sparks Fresh Perspectives
In an increasingly complex and dynamic world, there are ever more challenges and opportunities for the investment industry. Macroeconomic and political uncertainty has surged in the wake of the Russia-Ukraine War and the subsequent rise in geopolitical tensions between the US and China, the largest global players. More extreme weather events reflect a rapidly changing physical world — one that is likely to significantly shift resource allocations and impact regional economic growth. Technology continues to evolve at a pace that exceeds our expectations. With the release of ChatGPT, an artificial intelligence (AI) chatbot, at the end of last year, the possibilities of AI and deep learning are more expansive than ever. In addition, digital finance and blockchain technology offer opportunities in financial services that we have yet to fully realize.
In financial research, we must accordingly adapt, yet at the same time stay true to our principles. The philosophies of investing have not changed despite these rising complexities. Intelligent investing is about identifying investments which reflect real economic value, and to put them together in portfolios where valuation, diversification, downside risk, transaction costs, and liquidity are all taken into account. To be a successful investment manager today requires broader insights and greater expertise across a wide range of subjects. As a research-led asset manager, we believe that cross-functional, cross-team collaboration is more important than ever.
State Street Global Advisors enjoys a competitive advantage in this complex world. Why is cross-team collaboration so critical to innovation? Because combining diverse perspectives can push investment professionals into new ways of thinking. We want to highlight examples of how collaboration across our organization has pushed the boundaries of innovation. Four articles summarize the research outputs from these collaborative cross-team efforts:
- Our first paper, A Fresh Look at Value and Growth, revisits the tenets of Value and Growth investing, and how they have evolved historically, particularly in recent years. We bring together investment professionals from our quantitative and fundamental stock-picking teams to discuss pressing questions about the state of Value and Growth and outline some of the trends that may impact sector valuations in the future.
- In the second paper, Is Value Investing Really Just an Interest Rate Bet?, we explain why the correlation between interest rates and the value premium has risen in recent years, and we consider whether value investing can reliably serve as a way for investors to make interest rate bets. We take a data-driven look at the reasons for value outperformance/underperformance, and connect the fluctuations in interest rates with the changes in index composition.
- Our third paper, Advancing Our Proprietary Asset Allocation Research, summarizes our recent innovations in asset allocation and fixed income research. We describe how we are evolving our long-term asset class forecast models including the introduction of so-called “long-horizon” risk estimates and how we are enhancing our strategic and tactical asset allocation models. We also preview a new model for high yield spreads called the State Street Global Advisors Regime Switching with Gradual Transition Model (RSGT).
- The fourth and final paper in our series, Putting the Power of AI to Work in Investing, discusses our efforts in artificial intelligence (AI) and machine learning (ML). We discuss the promise of AI/ML techniques for improving the information quality of our alpha signals, particularly the use of natural language processing (NLP) algorithms in refining traditional quantitative signals. We also describe how we are using more traditional ML techniques in finance, such as Markov Models, Principal Component Analysis and Random Matrix Theory-based shrinkage models across our multi-asset class platform. (See glossary at the end of this piece.)
Fostering a culture of innovation, open dialogue and debate is paramount for today’s investment managers. Our own experience has taught us the key role that cross-team collaborations have to play in building the type of research culture we need to succeed. Sharing insights across different priors and views of the world, and across geographies, asset classes, and backgrounds, allows us to broaden our knowledge base beyond the sum of the parts.