How investment managers need to adapt in a world shaped by AI
As the chief investment officer of Stanlib Multi-Manager, I spend about the same amount of time thinking about and developing technology as I do thinking about investments.
Will a machine pick your next stock? Will it sift through data at a speed no human can possibly achieve?
A few years ago, this question might have sounded flippant, even insulting. Technology is rapidly changing the way we live and work, with artificial intelligence (AI) or machine learning predicted to affect the entire value chain significantly, to varying degrees.
While some applications of AI may seem gimmicky, others will have far-reaching effects. Machines can execute a wide range of simple and complex tasks more efficiently and cost-effectively than humans.
In the field of radiology, for example, machines can identify certain kinds of tumours more accurately than the best radiologists. Already, with a phone app you can determine whether a mole on your body is malignant or benign.
More data is at our fingertips than any time before. By IBM’s estimate, every day we produce 2.5-quintillion bytes of data (25 with 17 zeroes after it). This means 90% of the world’s data was created in the past two years. Machines can sift through billions of data points and identify patterns no human could. The challenge is to use technology to mine this data.
A machine, on the other hand, could examine the full financial history of a company – as well as that of all other companies in the industry, sector, country and world – within a matter of minutes
Smartphones are equipped with enhanced capability for speech recognition, natural language processing and real-time translation. Self-driving cars will have consequences for public transport systems.
Blockchain technology has the potential to remove banks from the process of managing transaction record-keeping. AI is also affecting how we invest and manage our money.
Traditionally, financial analysts have been responsible for picking securities. To establish a company’s intrinsic value, analysts make assumptions, build models, meet with management, pore over financial statements, and read industry and company reports by other analysts. They sift through a mass of data and still only process a fraction of it to make their decisions.
A machine, on the other hand, could examine the full financial history of a company – as well as that of all other companies in the industry, sector, country and world – within a matter of minutes. It could consider companies up and down the value chain and digest other sources of information, such as tweets, stock-exchange news service announcements, news reports in print and video, public forums and official and unpublished economic results. No human has the ability to trawl through an equivalent volume of data, let alone find actionable information within it.
What will it take to be a successful investment manager in a world shaped by AI?
Asset managers need to understand the transformative power of technology so that they can identify themes for longer-term investing. Managers will need top-notch skills in mathematics, statistics and probability, computer programming and data management. Combining those skills with investment knowledge will enable them to understand the worth of investment options and exploit opportunities as they arise. In the past, some money managers avoided investing in technology stocks because of the dot.com bubble, where spectacular losses were made by companies that failed to capitalise on their innovations.
One such investor was Warren Buffet, CEO of Berkshire Hathaway and one of the most successful investors of recent years. In 2017, after his company had bought shares in Apple, he apologised to investors at an annual meeting for not having invested earlier in Google.
In June 2017, Apple, Alphabet (holding company for Google) and Microsoft occupied the top three places on the market capitalisation rankings. Stocks in technology companies can no longer be ignored. Furthermore, it is crucial to use new technology to build investment solutions for different clients.
There is space for apps to be developed that enable investors to design a portfolio that meets their investment goals, select a suitable asset manager and allocate assets. Investment managers need to position themselves carefully in this loop, as it is their expert advice that is the critical ingredient to a successful client relationship and flourishing investment portfolio.
Technology is disrupting traditional business systems and methods; many people will find themselves out of work.
We need to anticipate how technological changes will affect our businesses and find ways to harness their power for maximum benefit. If we don’t, we risk getting left behind.
• Frasco is chief investment officer of Stanlib Multi-Manager.