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“The use of AI in investment activities is the holy grail”

Most agree it is no longer a question of if but when and how AI will impact asset management, particularly its role in investment and portfolio construction.

Tim Warrington, Chairman of The Group of Boutique Asset Managers (*GBAM) and SKAGEN Funds, a member of GBAM, talked to Twingly about how smaller, active managers approach AI and competitive intelligence and what opportunities and challenges they face.

“The use of AI in investment activities is the holy grail but still an uncertain area. Some quantitative managers are advanced and have built their entire investment proposition around it. Small boutiques such as GBAM members tend to be active managers, where we rely on human judgement. We do not necessarily want solutions that would replace that,” Warrington said.

These managers are more interested in finding and adopting tools that would help improve the quality of that human judgement. “I do not think there is any competitive advantage in claiming you have data sources that others don’t. It is naive to imagine that you are better at discovering facts that nobody else can,” he said, adding that ‘we are better at processing and assimilating these various data sources and making judgements on them', is a more legitimate claim and one where AI can help.

For smaller active managers the first step is usually education about the solutions available and the terminology used. Warrington noted that this is particularly true for people born before the 1990s digital and internet revolution. He pointed to research that clearly shows that companies where the management and leadership are prepared to learn about AI have a clear competitive advantage. “If you don’t dive into it there is a great danger that you will be left behind,” Warrington said, adding that the industry is at a relatively early stage in using AI in the investment process, compared to tools available in areas such as communication and automation which have already been widely adopted.

Warrington noted that the AI and competitive intelligence providers seemingly have very good material, but the coverage remains narrow and focused on North America. “If you want a solution that covers global emerging markets, for example, the material needs to expand to be usable. There is still some way to go before we reach this point,” he added.

Warrington said that all active managers are looking at the various tools available or in development. “Some are working with developers to create in-house solutions, and some are trialling existing products. SKAGEN is in the latter category, exploring the market,” he noted, adding that younger, more junior portfolio managers or analysts tend to be most interested. “We are letting them run shadow portfolios using AI tools to help with analysis and see what the results are,” Warrington explained, noting that anything new is tested before changing the investment process and they are especially cautious before upsetting the apple cart and run money in a fundamentally different way.

Warrington does not believe AI is ready yet to significantly disrupt the investment process of active management boutiques. “We don’t know when this will become the answer to our prayers. Until we have quantum hardware, i.e., the full potential of AI to do the life-changing things we hope it might be able to do, we are not yet there,” he said.

Because of the costs involved, boutiques are interested in partnering with providers they use, not just within AI or competitive intelligence. “If you are a reputable manager in a specific niche area you can offer something of a testbed. It is interesting for developers as they want to have access and cite you as a client,” Warrington said. Boutiques generally cannot do what the largest players are doing i.e., hiring an in-house team to drive the development of proprietary tools. “We can work as an adviser and guide developers on what is pertinent to our business,” he added.

Warrington believes that in future the market will recognise clear winners among solution providers for portfolio management, like Bloomberg which everyone has gravitated towards and is seen as a must-have.

However, Warrington also argues that the investment world is a ‘pretty broad church’ with room for contrarian managers who don’t believe in AI. “I’d like to believe that in ten years’ time there will still be a place for somebody doing something that nobody else is doing, even if that is considered very old-fashioned. There may well be a competitive advantage in doing that if everybody is using similar tools that generate similar outcomes. This will be comparable to the massive trend of passive investment and the argument that markets now cease to be efficient because of it. There will be similar unintended consequences,” he said, predicting that there may well be opportunities to invest against the herd. He also pointed out that with increased technology comes increased vulnerabilities to cyberattacks and technological malfunctions which further speaks against converging to the median.

Warrington said that clients are also increasingly asking their money managers how they approach AI and new technology in investment decisions. “There is the expectation that you should be technologically savvy and embrace it as a modern asset manager. If you say you are not doing anything in this area you had better have a good explanation as to why,” he concluded.

By Pirkko Juntunen


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*GBAM is a network of 15 senior executives who run independent specialist asset management firms. They have joined forces to boost their presence in their area of expertise. They do so by sharing information and making themselves, both individually and collectively, available to potential investors. GBAM is a non-profit, private company. Some of the principal activities include identifying best practice in all aspects of asset management such as research, portfolio management, risk control and marketing to name a few.


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