How we use AI technology in investment management?

When we apply technology to the fund selection process it could be described as a “funnel” approach where AI can drill down to a smaller set of funds from the wider pool.
Louis Greening

Investment Specialist

Clear Financial Advice

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There is no question as to the importance of technology in investment management. This has been evident for decades. But given the widespread choice of assets, stocks, and regions available to investors these days, technology and AI is at the very core of how the industry operates, identifies, and processes decisions daily. Investment management more so than many other industries use technology and AI in many ways and to varying degrees. We have all had to adapt during this crisis and fund managers have had to build new ways to collaborate with analysts and their team to find opportunities. 

Index investors for example have embraced the use of AI, as by its nature, technology is at the very heart of the product. Stocks and the level of reporting required gives investment managers enough confidence in the accuracy of the data that is provided. This can also be said for fund managers who hold positions in companies. Most of this data is heavily regulated and as such investors can have greater confidence in the information provided.  

Streamlining processes across the investment process has certainly improved, where communication both internally and externally to end clients has vastly improved as a result of lockdown and the restrictions that have been in place for businesses. In addition, for many small investment management businesses like ourselves where content creation and communication to the end client as well as portfolio management are all one responsibility, technology allows us to monitor content and click rates in order to tailor our communication more effectively.

My role is to identify active fund managers that will outperform their peers on a consistent basis, unless the market is relatively efficient, then we may look for passive alternatives. Our process is very much top-down, and the funds are selected based on the likely ability that their style and stock selection can outperform within the current market environment. When we apply technology to this process it could be described as a “funnel” approach where AI can drill down to a smaller set of funds from the wider pool. It is after this where technology has less significance on our decision making.

There are however some potential problems that I face when going through this phase of management. “Technology is a useful servant but a dangerous master” to quote Christian Lous Lange (a Norwegian Historian), is never truer within the context of investment management. 

In my experience the process can only work in its true sense if the data that is fed through to the technology is accurate, timely and consistent. Unfortunately, this is where technology can have a detrimental effect to the outcome. The UK has more than 1,100 asset management companies all with a range of funds on offer. Each fund or vehicle must be analysed, and the data must be fed through a variety of investment tools which operate. It is therefore extremely unlikely that each asset manager will produce the data required at the same level and at the same time. Some are simply not comfortable with providing a detailed holding breakdown, others may classify a stock differently to others and some may run on monthly or quarterly data entry. In summary, technology has improved many areas of our industry including client communication and reporting, but it can be said that for investment management and specifically in selecting active fund managers it is sensible to take a more hands on approach in making the final decision.

When it comes to the funds we select, 99% of those will have a team of analysts who sit underneath the fund managers to support decisions within each fund. We believe “machine-assisted” analysts can provide better opportunities for fund managers than the more traditional, where perhaps 20 years ago, time was spent reading company reports and listening to CFOs. Although this does continue, technology has allowed individuals to tailor there working day to become far more efficient.

When it comes to selecting funds, I do however sit in the more traditional camp where inefficient markets can offer opportunities to the right fund manager, but it is my role to identify these and as technology can support our decision and begin the process, we still see the traditional approach of identifying opportunities then meeting with managers as the most significant part of our investment process.

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How we use AI technology in investment management?