In the next decade, artificial intelligence (AI) will transform our lives – for better or for worse. Mark my words, its impact will be comparable to the invention of the light bulb, the internal combustion engine, the personal computer, and more recently the Internet and the iPhone.
Speak to some economists and they argue that AI will be a decisive force for good. It will drive economic growth through huge productivity gains as business processes are streamlined and many jobs – and tasks – currently performed by humans are performed by singing, dancing AI tools.
Others argue that AI is the equivalent of aggressive knotweed and needs to be reined in before it spirals out of control and endangers democracy through misinformation, misrepresentation and abuse.
Whatever your personal opinion – and it’s currently a hot topic for discussion in my local pub – AI is here to stay. And its role in society will only grow as it becomes more sophisticated and “intelligent” – from providing detailed answers to questions from people using search engines to its widespread use in key areas of our lives, such as work and healthcare.
Yes, ChatGPT and Bard – AI “chatbots” developed by Microsoft and Google respectively to mimic human conversations online – are just the beginning. You haven’t seen anything yet. All aspects of our lives will be affected by AI – including the way we go about building wealth over the long term.
Finger on the pulse: Whatever your personal opinion, AI is here to stay
WILL AI INFLUENCE THE INVESTMENTS WE HOLD?
While still early days, the impact of AI on the country’s fund management industry could be seismic. Instead of the investment funds we hold in our ISAs and pensions being managed by extremely well-paid investment experts, there could come a time when many are instead managed by intelligent AI tools. Hello robots, hello thousands of mediocre fund managers.
And if they’re not run by AI, they can be assisted by it. So the potential stocks that a manager puts into their fund can be drawn from a list compiled by AI, rather than an investment analyst scouring company accounts and independent research looking for investment gems day and night.
The implications are enormous. More transformative than when index-tracking funds came on the scene in the late 1980s, giving investors the opportunity to enjoy market-based returns, rather than being beholden to the competence (or incompetence) of managers managing their funds.
AI-managed funds could – and there is a good chance – offer investors the equivalent of an investment elixir. That is, investment returns that are consistently better than what an index tracker can deliver and perhaps (a big maybe) performance that is superior to what the best ‘active’ fund managers – with years of experience behind them – sweat out of their carefully curated portfolios.
Imaginative? A utopia? Perhaps, but an experiment conducted by financial comparison website finder.com indicates that an AI-curated fund portfolio has the potential to generate superior investment returns.
HOW A ROBOT PORTFOLIO DONE IN A TEST
Website Finder asked AI tool ChatGPT to build a portfolio of “high-quality” publicly traded companies, based on the investment principles mainstream fund managers commonly use to identify winning stocks. These include seeking companies with low debt, a record of sustained growth, and a competitive advantage over direct rivals.
ChatGPT came up with 38 stocks to build the portfolio around, most of which are listed in the United States. Think of tech giants Amazon, Meta and Microsoft, but also well-known brands such as Coca-Cola, Johnson & Johnson and Visa.
The website then pitted this portfolio against a portfolio that included ten of the UK’s most popular mutual funds – a mix of index funds (both UK and global), mixed equity and bond funds and one of the country’s most popular actively managed funds, Fundsmith Equity . .
This £23bn fund, led by investment legend Terry Smith, has delivered an average annual return of 16% since its launch in November 2010 – hugely impressive on every level. The equivalent annual return of the MSCI World index over the same period is 11.1 percent.
Since Finder launched its experiment in early March, ChatGPT’s portfolio has come out on top, with a total return of just under 4.7 percent. This compares to a loss of almost 1.9 percent recorded by the portfolio of ten funds.
The results led Jon Ostler, CEO of Finder, to state that “it won’t be long before large numbers of consumers try to use it” [ChatGPT] for financial gain’.
More emphatically, he added that fund managers “might be starting to look nervously over their shoulders.” A supporting survey conducted by the website indicated that nearly one in five adults in the UK would ‘consider seeking financial advice’ from ChatGPT.
Of course, Finder’s research shouldn’t be taken as definitive – the results are based on too short a time period to be considered anything but interesting.
As a well-known fund manager told The Mail on Sunday, the investigation was “a few years too short” to draw any definitive conclusions.
Still, the experiment gives us a glimpse into a future where AI funds could become a regular part of the investment regime, competing for investors’ money alongside index-tracking funds and best-in-class actively managed funds.
HOW ROBOTS CAN WEAVE THEIR MAGIC
“Undoubtedly, fund management is one of those areas where AI can have a major impact over time,” admits Jason Hollands, managing director of fund platform Bestinvest.
He says many investment groups already manage “quantitative” or “systematic” funds, where portfolios are constructed based on quantitative analysis of financial data performed by sophisticated computer programs. So the jump to AI wouldn’t be that big for them.
But he believes there are hurdles to overcome, the biggest of which is a regulatory one. “The fund management industry is highly regulated as its job is to manage people’s savings over the long term,” he says. But would a fund managed by a thinking AI machine be limited to rules set by human regulators? Allowing AI to run an investment fund would pose significant risk to the investment company if it violates city regulations.”
John Moore, a senior investment expert at asset manager RBC Brewin Dolphin, says the fund industry will have no choice but to embrace AI – “industries must adapt or else fall behind.”
Still, he believes its main role – at least for the foreseeable future – will be in collecting, processing and reporting information used by fund managers to make investment decisions. He says, “Think of the amount of analysis required to gather information to understand the effect of factors such as investor sentiment and political news on the markets. All this information can be collected in real time by AI, enabling fund managers to make smarter investment decisions.”
WHAT FUND MANAGER SAY ABOUT THE ROLE OF AI
Most of the investment managers The Mail on Sunday has spoken to in recent days are downplaying the prospects of a bloody AI investment revolution – with fund managers going the way of most BT phone booths (decommissioned).
A renowned fund manager told the MoS: “Saying that an AI model can run an investment fund is a bit like playing video game Call Of Duty and assuming that makes you fit to serve in a combat infantry unit.”
Christopher Rossbach, managing partner of London-based investment house J Stern & Co, was also sceptical. Just after attending the annual general meeting of Berkshire Hathaway in the United States – the company led by investment guru Warren Buffett – he said: “I don’t see a future where investment judgment is replaced by AI.
Yes, AI may be able to analyze masses of past data – useful in making investment decisions – but it cannot make judgments about the future. That’s where fund managers like us earn our living, based on years of investment experience and knowledge.’
You would expect these individuals to fiercely defend their patch – and the funds they manage will most likely continue to thrive as a result of their individual investment acumen.
But it doesn’t mean that AI won’t find its way into the fund management industry. Investment house Sanlam has already embraced it by using its ‘Orbit Insight’ AI tool in running two investment funds, Global Artificial Intelligence and Asia Pacific Artificial Intelligence.
Developed seven years ago, Orbit Insight collects data from a variety of sources – corporate websites, news outlets and regulatory websites – used by the managers in building the two portfolios. Sanlam says the AI tool helps build “more resilience” into the funds.
The performance figures suggest it has a positive impact. Over the past five years, the £654m Sanlam GAI fund has delivered an 87% return – better than the 55% return on investments in the FTSE World Index.
For now, AI’s role in fund management is likely to be a complement rather than a major driver of investment returns. But as smarter tools come to market, AI could crack the nut no one (not even Buffett) has yet to crack: being able to make reliable predictions about stock market returns. And in doing so, it could send an army of mediocre fund managers to the proverbial scrap heap.
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