The impact of artificial intelligence on investment management

Over the past 20 years, portfolios have become less ‘human’ and more programmatic in approach, as the industry has attempted to automate the collection and analysis of results, news and data.

The artificial intelligence (AI) revolution may take us further down that path, and average holding periods may soon be measured in weeks and even days rather than years.

This greater focus on the short term has resulted in a deterioration in the alpha – or excess returns above the market – available over that time horizon. The exponential growth in computing power is making short-term informational advantage increasingly difficult to achieve. The short-term has been commoditised.

Combining AI with HI

However, that is not to say that all advances in technology are bad. It is rather about ensuring they are adopted in a way that is aligned to your objectives. In that sense, data science should be viewed as a tool just like any other tool. It should serve to complement and enhance decision making, not a replacement for it.

It’s a view shared by Dr Pippa Malmgren, Co-founder of H Robotics. Speaking at the AMP Amplify conference , Dr Malmgren stressed the importance of using human ingenuity – HI – in conjunction with new technologies such as AI. “We need other ways of thinking that are not just analytical,” she says.

She says imagination will be important in a tech-driven world and highlighted a shift from what she called analytical to parenthetical thinking – which is about understanding the mood as well as the math.

Dr Malmgren stresses the need to deviate from the norm to achieve progress and operate from a mindset that anything is possible. “The minute you have certainty you are operating from a position of mediocrity.”

The AMP Capital approach

It was this type of thinking that was utilised in the creation of AMP Capital’s global equities philosophy, focusing on absolute risk and return rather than beating benchmarks. We invest with a long-term horizon in a concentrated portfolio of companies with strong current or anticipated cash generation prospects.

The competitive foundations of companies have changed over time away from physical assets such as plant and machinery towards intangible assets such as innovation, patents, research and development, process know-how, culture, brand and intellectual property.

Understanding these intangible drivers is a highly nuanced process. Furthermore, quantitative techniques are based on historical data sets which are inherently poor at predicting change, a significant challenge in a world where the pace of change or ‘disruption’ appears to be increasing.

As such, we see longer-term investing as one area of active investment management where a fundamental investment philosophy still has a sustainable edge against the rise of the shorter-term focused machines.

AMP Capital is committed to building market-leading, bottom-up, fundamental insights about individual companies and investment opportunities and harnessing the full breadth of our active investment capabilities to successfully invest in the digital age.