RVE: Hi Clare, artificial intelligence and data analytics are becoming increasingly prevalent across the whole of the asset management industry. But at Essentia you specialise in behavioral analytics. What do you mean by that?
CFL: Well, whilst people’s tendency is to focus analytics on what other people are doing, we’re interested in analytics on the behavior of the actual investor within the investment management company – and looking inward at “what am I spending my energy on?” and “is it working?”.
RVE: This is something that you are already working with asset managers to do?
CFL: Yes that’s right. We’ve worked with 25 different asset managers so far.
RVE: What has been the reaction from those asset managers to working with Essentia and to the data you are providing?
CFL: Well, the initial reaction before they start working with us is sometimes one of fear, a certain nervousness about being “found out”, or being shown something that is not positive. And yet, rationally, we all know we are good at some things and not good at other things, and that, in order to improve, we need to know what things we are not good at, and then do something about them. So once people start working with us, they see that this is not about judging them or criticising them or telling on them, it’s about helping them. And then they breathe a sigh of relief and we end up being a time that they look forward to having, where we sit down with them and really dig deep into what has been going on in the investment process and what can we do to help improve it.
RVE: You mentioned the fear aspect. From what I understand, as well as analysing the trade and holding data, the managers will also submit diaries about themselves and their lives and they can get really quite personal. Do you never encounter some discomfort from managers about submitting to a third-party such personal information?
CFL: Yes, but that is entirely optional to the manager; so no-one forces them to write anything down that is personal or sensitive. But, a lot of managers today have realised that – if you look at athletics – athletes record every little thing they do whether it’s automatically, via sensors, or by keeping track. And that is how they win. If you want to win as a fund manager, you need to be prepared to really go that extra mile. So, for people who are up for that, we encourage them to keep track of how they are feeling, what they are doing, what they are thinking about. And if they’re worried about recording something extra sensitive we give them an option to call it something different, that nobody else will understand except for you.
RVE: Such as what?
CFL: We have a number of clients who are interested in looking at the correlation between their consumption of alcohol on a given night and their investment decision-making the following day. If they are concerned about recording how many drinks they have had on a given night, we’ve suggested they record something about how many “servings of fruit” you had yesterday – something no-one would criticize them about, if anyone ever did find out about their fruit consumption. They know it’s not actually about fruit, and no one else cares; it’s really about them understanding their own behavior and making that connection.
RVE: Is there a danger that people become over reliant and read too much into this kind of data? Yes, I can understand that if I have had a lot to drink the night before, maybe that will affect my performance the next morning. But if I’ve had, say, toast instead of cereal for breakfast, will that really make a proper impact on my performance? Maybe I’ve just had a bad day?
CFL: Probably not is the answer about toast vs. cereal, and we don’t tend to get that granular. But what we are looking for is actually statistically significant patterns and I suspect something like the exact contents of your breakfast wouldn’t produce that sort of pattern. What would might be how many hours of sleep did you get, or how are you feeling on the day. That sort of factor does have an impact and there is plenty of academic research that supports that. What we are looking to do is actually test it in real life with real people and then show them those results.
RVE: At the moment this service is only available for investment professionals but do you think it could be made available for other parts of the asset management industry?
CFL: Yes. We started with investment professionals because I used to be one of them, but also because, at the end of the day, their job is to make decisions and those decisions have a financial impact that matters to the viability of their business – so it’s the number one most important thing for them. But there are plenty of other roles within the industry that involve making the same type of decision over and over again and where that is the case, a service like Essentia’s, which takes data about the decision that is being made and looks for patterns in how it’s being made and what the outcome tends to be, could be quite useful.
RVE: Could regulators not use this data as well?
CFL: Regulators could use that data, in the sense that they care about monitoring investor behavior for bad behavior and there are a number of firms out there who are focused on providing that. But we at Essentia actually intentionally don’t do that because we are actually trying to assist the Fund Manager. If we start supplying data to the regulators and or making this about compliance, the trust level goes away for the Portfolio Manager. As result they’ll be less honest about why they’re doing what they’re doing. So we really want them to trust us that this is about helping them, and not about helping the Regulator or the Compliance Team (although it could be used for that purpose).
RVE: Ok Clare, thank you very much.