Tom Bok: The intersection of fundamental investing and data science offers investors access to new alternative data sets and a more nuanced understanding of existing data. There is an enormous and expanding amount of data available to try to leverage into an informational edge for our clients. For investors at Wellington, the truly limited resource is time, not data.
Our Investment Science Team, therefore, works to create data science tools that fit into our investors’ processes to help guide their focus. We aim to direct their expertise to where it will be most fruitfully employed through cleaner and more impactful data. We think the value of better interpretation of data in the investment process is underappreciated by much of the market.
Peter Carpi: As an investor, I appreciate how data science offers key inputs into my idea generation and due-diligence processes. It also plays an increasing role in portfolio construction and risk management. For example, as a small-cap2 investor, my universe covers approximately 3,000 stocks between the Russell 2000 Index3 and the Russell Microcap Index.4 My process focuses on inflections in business momentum, and we’ve found that there’s an enormous amount of untapped information in company meeting transcripts. But with over 25,000 transcripts per year, it was impossible to read and analyze them all.
Fortunately, working with our Data Science Team, we were able to build a proprietary Natural Language Processing (NLP)5 tool that we can train to automatically scan tens of thousands of transcripts in a matter of minutes for signals of key inflections. For instance, these 3,000 companies have an average CEO tenure of five years, meaning there are approximately 150 CEO changes every quarter. Our NLP tool can help me see these potential transitions—which represent a possible inflection point for any business—across this large and inefficient universe of stocks. This collaboration scales up my process in a way that would not be possible without data science, creating more opportunities to generate alpha for clients.