Machine learning, big data and the study of human biases are leading to a deeper understanding of the emotional forces that influence investor behaviour. Combining these elements into the investment process creates a robust framework for guarding against common investor pitfalls. 
Weaker growth trends, an increased level of political uncertainty and record low interest rates create a world full of challenges for savers and investors.
For some savers negative interest rates are now emerging on the horizon, others are simply confused and fearful by the unusual environment. Most of these (new) investors need guidance in their investment decisions.
In this challenging environment, multi-asset funds offer an effective way to manage uncertainty while at the same time being able to exploit opportunities in a risk-aware manner. The flexibility of multi-asset funds provides more robustness in periods of stress and creates a steady capital appreciation in the long run.
However, managing multi-asset funds that combine the objective of attractive returns with a limited level of downside risk is not an easy task.
There is never a dull moment in markets, definitely not in the last decade with all its financial, (geo) political and institutional crises. And even when weeks or months of calmness pass in which no shocks are hitting the system, markets often find stories that excite them.
Being in markets and appreciating that markets can influence the underlying ‘real’ economy just as easily as the other way around, means these market emotions cannot be ignored.
Over the last decade or so, financial markets have lost some of their fundamental anchor. The reduced liquidity in secondary markets, the increased usage of ETFs and derivatives and the increase in speed of information processing (high frequency trading, CTA managers) have increased the effect of emotions on markets. For investors this means that the study of behaviour has become even more important than before.
Given the Dutch origin of NN IP’s Multi Asset franchise, being outward looking and open-minded is part of our team culture.
A desire to explore the world and eagerness to trade in international markets has been at the roots of our nation. The first stock exchange in the world was established in 1602 in Amsterdam. The first financial bubble (and following bust) also emerged in The Netherlands during the Tulip Mania of 1637.
This heritage is still reflected in our thinking about global capital markets today. Exploring global markets offers amazing opportunities, but understanding both the fundamental and emotional drivers of these markets is crucial in navigating through the uncertainty.
On the fundamental side of the analysis we aim to map the direction of change in the global business cycle, corporate earnings, household income, inflation metrics and we balance the risks around this type of macro variables.
Moreover, we look at a broad valuation spectrum per asset class, both in absolute and relative sense. Currently, these fundamental drivers are mainly supportive of equities, as both the direction of change in the underlying macro environment and our valuation radar remains supportive.
However, the behavioural side of the equation receives an increasing share of our attention. We try to assess the mood of Mr. Market by analysing his observed emotions and actual flow and price dynamics in the market.
Sentiment can be measured in many ways and the tools to do so are rapidly changing.
Investor surveys have been common for many years and provide a good insight on how optimistic or bearish investors say they are when asked directly. In recent years, the digitalisation of all our communication has also delivered new opportunities to measure more indirectly how investors are feeling, by mapping what is expressed on digital financial news platforms and on social media. Embedding this digital news flow into our decision making process is one of our most important innovations that has helped us to adapt to a changing investment landscape.
In order to assess the possible upside or downside of the market, especially in the light of risk events like elections or central bank decisions, it is necessary to have a good understanding of how investors are positioned and whether certain market trends could be ready for a short-term reversal.
We build this part of our analysis by carefully analysing the exposures from active allocation managers like those of other multi-asset funds, macro hedge funds, CTA’s, balanced funds and long-short equity funds.
In addition to current positioning, we look at the strength of investment flows of both institutional and retail investors to various asset classes and try to assess their persistence. Due to the increasing amount of assets in passive solutions, the study of ETF flows has grown in importance in this field.
Although there is currently not a uniform picture from these types of sentiment metrics across risky assets, it is noteworthy that the digital news flow captures nicely the rising political risks and general higher uncertainty.
To us, these drivers weigh negatively on more risky assets. However, measures of persistence in herd behaviour, like flow and momentum indicators, still send positive signals for risky assets like equities.
Once we open our mind and map investor behaviour next to analysing underlying fundamentals, a mixed picture emerges.
Headlines stories on politics, policymakers and corporate news capture a lot of attention these days and justify a cautious overlay on some of the more unbiased information on market emotion and macro trends.
The latter however still provide an ongoing anchor for our modest risk-on allocation stance. Equities remain our preferred areas of investing, due to solid fundamental support that combines with a modestly cautious behavioural picture.
And although higher political and policy uncertainty provide some ongoing support for government bonds, the extreme over-valuation in especially bunds makes us clearly cautious in that space.
Valentijn van Nieuwenhuijzen is chief strategist and head of multi-asset at NN Investment Partners. The views expressed above are his own and should not be taken as investment advice.