Story written by Jon Hartley Forbes
Google has been making some waves recently over reports that it intends to enter the asset management industry following recent suitability studies the firm has conducted. Facebook has recently explored entering the financial services industry as well, as the company is reportedly seeking to set up an international monetary transactions service for Facebook users.
Google Headquarters in Mountain View, California
However, what really sets Google apart in its foray into the financial services industry are its advanced analytics capabilities from Google keyword search volume to advanced satellite imagery that could be leveraged to predict macroeconomic and company trends, which could ultimately be applied to developing highly advanced investment strategies.
Using “Google Trends” search volume for keywords can help predict economic variables like unemployment claims
Hal Varian, Google’s chief economist, co-authored a paper shortly after the financial crisis, demonstrating how Google Trends, which aggregates search volume for specific words or phrases, can accurately forecast unemployment claims, a key economic indicator which is released weekly by the Department of Labor.
Being able to accurately forecast such a figure could certainly help an investment strategy to time the market on weekly unemployment claims releases and produce excess returns for clients. Certainly, this type of approach could be expanded to predicting other economically relevant variables ahead of market-moving government data releases.
Google Trends aggregate search volume for “Unemployment Claims” versus official Initial Jobless Claims figures
Source: Hal Varian, Hyunyoung Choi. “Predicting Initial Jobless Claims”
Several other firms have been using this approach to gain an informational advantage for quite some time using what are commonly known as “web scrapers” which are programs that scrape and aggregate data off of the internet.
Hedge funds like Bridgewater Associates with $87.1 bn in hedge fund assets and AQR Capital Management with $29.9 bn as of January 1, 2014 are both well-known for their advanced web-scraping capabilities significantly contributing their excess returns and their rapid growth in assets over the past 10 years, putting them among the top 10 largest hedge funds in the world.
There is little doubt that Google could follow suit and push the envelope even further by leveraging their search tools and technology infrastructure to identify and capture various information asymmetries that exist in the financial marketplace.
Google could use satellite imagery from its newly acquired Skybox to predict company earnings
Another type of information extraction that Google could employ in investment strategies comes from Neil Currie, a stock analyst at UBS, who famously forecasted sales figures for Walmart by using satellite photos to observe parking lot volume across Walmart stores.
Google’s interest in entering the asset management industry is remarkably well-timed with Google’s recent acquisition of Skybox Imaging, a company specializing in high quality satellite imaging that has produced the first HD video of earth from space ever. Of course, this type of satellite imaging could be applied to analyzing and extracting all sorts of company data.
For instance, satellite imagery could be expanded to determine inventory for car manufacturers or the amount of traffic coming through seaports. It could be used to analyze the progress of mining operations or infrastructure development. It could be used to study the supply chains of multinational companies like Apple AAPL +0.78%. The list of applications of satellite imaging is really endless.
Regulatory concerns and a technological arms race for asset managers
There are some concerns about hurdles that would be in front of Google entering the asset management industry. Catherine Tillotson, managing partner at Scorpio Partnership, a wealth management consultancy commented to the FT that “Entering a highly regulated industry is not something you do lightly.
There probably is a subsection of investors who would have confidence in Google, but I think the vast majority of investors want a relationship with an entity which can supply them with high quality information, market knowledge and a view on that market. I think it is unlikely they would turn to Google for those qualities.”
On the other hand, many see Google with its strong technology infrastructure as standing out among an industry where there is a technological arms race happening as a recent PwC white paper released in January, entitled “Asset Management 2020: A Brave New World”, asserted that some fund managers’ failure to keep up with technological change will create opportunities for groups like Google, Apple, Twitter, or Amazon to break into the market.
Google’s experience with venture capital and investing its own money
While Google is in talks to begin an asset management arm that would manage client assets, in 2010 the internet group launched a California-headquartered trading operation (which also has a bank-style trading floor) to manage its own cash better. Not to mention, Google’s venture capital arm, Google Ventures, has invested in more than 189 companies including Uber, a taxi app, and Kensho, a financial analytics firm.
With the technology and analytics infrastructure that Google has combined with the small finance infrastructure it has already built out to manage its own capital, entering the asset management space really seems like a no-brainer for Google.
Posted by: The Trust Advisor