Artificial intelligence in asset management

Artificial intelligence in asset management? “I’m afraid I have no answer to that question.” (Alexa)

February 10, 2020 | Digital Asset Management

Every day, various forms of artificial intelligence (AI) make our lives easier – be it during a conversation with Alexa, in the form of self-driving cars and parking aids in traffic, or during a visit to the doctor, where our data is compared with millions of others in order to obtain an early diagnosis. The financial industry has also been experimenting with AI and algorithms for some time now. The goal: Computers should make better investment decisions than humans.

How AI funds work

Basically, AI is used to capture the mood of the stock market. To do this, computers analyze millions of articles on social media platforms, online news sites, and blogs – in a matter of seconds, thanks to ever-improving computing power. Investments are then made in the companies that, according to the machine, have the greatest potential. Another area of application is location data analysis. This involves collecting movement data from people via their smartphones to allow conclusions to be drawn regarding macroeconomic key figures. A few examples:
  • Commuter movements are collected and analysed to obtain early forecasts of the development of the unemployment rate.
  • At airports, the number of smartphones is tracked to obtain passenger figures in real-time.
  • In shopping centers, the length of time visitors spend in the mall provides information on retail sales trends.
  • Even more advanced: Programs are already in the process of evaluating the voice of company bosses at public appearances in order to gain a picture of the company’s situation – welcome to the 21st century!

Machine should take emotions out of the equation

Irrationality, fear and greed are the greatest enemies of the “human” investor. The classic: get in when prices are rising, get out when they are falling. Whoever sells cheaper than he buys in the long term loses money. Of course, computers do not know these emotions.But: even with a solid investment strategy and the corresponding hedging processes, such mistakes can be avoided. One of the highest principles of value investing is “Act in the opposite direction” – this means, among other things, buying shares in top companies at a “discount” even when prices are falling, and not selling everything in panic like the irrational investor. Not to act out of fear or greed is deeply rooted in this investment philosophy.

Robo-Advisors do not use “real” AI

Strictly speaking, the currently trendy Robo-Advisors are based more on algorithms than on artificial intelligence. These algorithms simulate passive index funds and scan the portfolios regularly in order to adjust them to the index based on them (= rebalancing). The algorithms are suitable as support in the passive investment process. But is it really decisive whether I am invested to 0.50% or 0.54% in a security? In our opinion it is much more important to buy the right companies at an attractive price. Robo-Advisors are still far from picking undervalued companies with positive growth prospects, as successful value investors have been doing for decades. Anyone who has ever asked Alexa a few questions knows one of her most frequent answers: “I don’t have the answer to that” or “I’m sorry, I don’t know”. The same is true for many other apparently artificial intelligences – no matter how complex the algorithm. Even though billions have already been invested in this area, AI is still in its infancy. Why do Robo-Advisors still exist? Due to the easy handling and the low fees they appeal to a target group that wants to participate in the stock market without much effort. The apparent connection to the AI often serves as a marketing tool – but in reality, there is hardly any real AI in use.

A turbulent year for AI funds

The advantage of machine learning when investing is that the intelligence adapts to the market and improves over time. The past year seems to have been particularly confusing for machines, although towards the end of the year some of the AI funds managed to regain some of their gains. “When the market becomes unpredictable, the challenge for AI is always greater,” says Anand Rao of PwC. In many cases, the analysis of the data also leaves something to be desired – patterns are identified that are already known, or correlations are found where none exist. Nobel Prize winner Robert Shiller also believes that AI still needs human surveillance. Since data is often taken from texts (from social media, blogs, etc.), typos or new meanings of words can completely distort a statement. The human would recognize such a thing – the machine would not (yet).

Core competence remains human

The challenge is to use technology where it brings the most added value. At Estably, this means: opening a securities account, deposits and withdrawals, and performance monitoring can be done digitally – any time, any place – just as it should be today. In these areas, technology helps us to make our clients’ investment experience as pleasant as possible. For our core competence – value investing – we prefer to rely on the many years of experience and expertise of our portfolio managers, who prove year after year that returns above the market level are possible. We are curious to see how the use of artificial intelligence will develop in our industry and when machines will consistently make better decisions than we humans. Until then, it remains our task to use our intellect and the given technical possibilities as sensibly as possible.
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Estably is the first Liechtenstein-based digital asset management firm to offer world-class asset management through a blend of technology and human investment expertise. Thanks to the portfolio managers’ many years of experience in the field of value investing, the aim is to achieve above-average returns – starting at an investment sum of € 20,000. The aim is to make professional asset management, which was previously possible exclusively for major investors, accessible to everyone – in a convenient, transparent and profitable way.

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