Thematic Investing Using #AlternativeData

Portfolio managers supporting mutual funds and exchange-traded funds pursue the selection process for securities to include in tradeable baskets often with a thematic focus. Sometimes, the focus is for an economic sector, which is why PolicyScope data has been mapped to NAICS sector codes.

The data revolution makes it possible to take a more scientific approach to risk measurement regarding public policy risks that impact thematic investment strategies. Quantitative data derived from the language of public policy (using our patented process of course) delivers to portfolio managers -- and their research directors -- enhanced tools for measuring and managing exposure to public policy risks relevant to their thematic focus.

Some economic sectors and thematic investment strategies are more exposed to public policy risks than others. For example:

  • Digital Currency and Climate Finance investment themes face material near-term opportunities and risks amid a dynamically shifting policy environment that will directly impact the cost structure for every firm in that sector.

  • Financial Sector investment themes face public policy risks related to shifts in regulatory capital and benchmark standards.

  • Supply Chain and Technology investment themes face public policy risks related to shifts in trade and data privacy standards.

Firms with strong management and strong balance sheets will be better placed to respond to policy shifts.

Until recently it has not been possible to incorporate public policy risks in a quantitative factor model without injecting potential bias into the calculation. Most firms that attempt to assess exposure to public policy risks regarding thematic investment strategies currently still rely on human intelligence and manual adjustments to parameters and assumptions.

Top Three Use Cases -- Thematic Investment Strategies

1. Daily Horizon Scan: Identify inflection points and subtle shifts in public policy relevant to a thematic focus (e.g., renewable energy). Assess whether market or corporate developments position an issuer or a portfolio to realize gains or losses from the shift.

2. Investment Thesis: Identify under-appreciated and under-reported strategic shifts in public policy that support specific thematic plays. For example, if financial regulators in one jurisdiction move more quickly to implement carbon-related regulatory capital requirements, the cost basis for doing business can increase but the revenue potential from customers and investors seeking to reward sustainability requirements might outweigh the cost.

3. Scenario Analysis/Nowcasting: Customize scenario analysis models with specific quantitative factors for public policy risks relevant to your sector (e.g., trade policy or rare earths policy for a basket of semiconductor stocks). Set the factors in relation to realized volatility data from PolicyScope. With over two years of data for most issues, cyclical trends and average volatility magnitudes can now be identified.


About BCMstrategy, Inc.: The company helps portfolio managers and strategists anticipate market volatility related to public policy/headline risk and take strategic market positions by delivering quantitative volume-based objective data drawn directly from the public policy process paired with data generated from media coverage from fact-checked journalism publishers like Dow Jones and ThomsonReuters.

Volatility signals are available via API regarding these issue areas: Digital Currency Policy; Climate Finance Policy, and Monetary Policy.

Charts, graphs, and verbal data are available through the V3 PolicyScope Data app on the Bloomberg Terminal at: {APPS PLCY <GO>}.