Post truth financial markets

One of the biggest challenges we face as investors is trying to determine what information is relevant and what is opinion, speculation or worse.

Over the past few years, most likely because of improved communication tools, the amount of information available to investors and the ease of gathering it has improved greatly. In the past, the investment banking industry and the financial media, built businesses that could profit from gathering information and passing it on in a succinct or digestible form. However, as this information can now be so readily accessed, this business model had to change. Now information is often packaged with high levels of opinion or noise to gain attention.

Every day there are headlines using emotive language. Last Friday we had ‘Pound sterling slumps as Theresa May admits ‘impasse’ in Brexit negotiations’, a headline clearly designed to attract or even disturb readers. Perhaps a more accurate headline ‘Sterling unchanged on week’ would not sell newspapers.

Similar examples abound, our challenge is to sift for the truth beneath the noise. We aim to focus on the data and try very hard not to be influenced by the emotional overlay that quite often cloaks the data. This noise is important however, as it helps us understand the market narrative. Returning to the earlier example, for an extended period the narrative around sterling has been negative, focussing on the Brexit negotiations and domestic economic weakness. Clearly being negative on sterling has been a popular trade.

We find a successful approach is to monitor news sources with different biases, either politically, from the left or the right, or perhaps more importantly from different regions. Rather than focus on media published locally, one benefit of technology is we can easily access sources from across the world, such as Asia and the Americas, to get both sides of globally important stories.

A further effect of new media is that, unless we actively avoid it, we will only receive information that reinforces existing biases, often the same opinion or information repeated ad nauseam. Behavioural finance teaches both that too much information is bad, so we seek out only relevant information, and to avoid anchoring we must seek conflicting information, an ever-greater challenge in today’s world.

At a more granular level, the same has been happening with equity research. Historically large investment banks produced equity research primarily as a means of driving revenue from the corporates they wrote on, with research payments from investors as a useful additional revenue stream. Post MiFID II, there is even less incentive for investment banks to produce unbiased research, given the institutions are to the greatest part paying for research out of their revenues and, hence, paying considerably less than in the past. Therefore, primarily positive research is written, and contrarian views are unlikely to be rewarded, meaning there is even less of any value produced by traditional brokers.

Even among the independent research providers, the incentive to produce dramatic headlines has increased, as their revenues have also been under pressure as active managers’ research budgets have shrunk post MiFID.

We have always been very selective in the sources we use and careful to recognise the biases of each source. Over time, we see the post truth market as an opportunity, as increasing inefficiency should mean the opportunity for genuinely active managers increases, so long as they are able to sift the substance from the noise.

Important Information:

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

Source for information: Miton as at 26/09/2018 unless otherwise stated.

The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Miton and do not constitute investment advice.

Miton has used all reasonable efforts to ensure the accuracy of the information contained in the communication, however some information and statistical data has been obtained from external sources. Whilst Miton believes these sources to be reliable, Miton cannot guarantee the reliability, completeness or accuracy of the content or provide a warrantee.

The Prospectus, KIID and application forms are available in English from the Authorised Corporate Director of the fund, Link Fund Solutions, at ; or from Miton, the Investment Manager of the fund, at

Issued by Miton, a trading name of Miton Asset Management Limited the Investment Manager of the Fund which is authorised and regulated by the Financial Conduct Authority and is registered in England No. 1949322 with its registered office at 6th Floor, Paternoster House, 65 St Paul’s Churchyard, London, EC4M 8AB.