We’ve invited select fund managers to write exclusively for The Constant Investor and address our question of the week. Plus we summarise the latest opinions of leading fund managers to bring you a range of views in one convenient location.
How will artificial intelligence shape the Australian economy generally and the managed fund industry specifically?
We ask five fund managers, who write exclusively for The Constant Investor:
- Philippe Jordan
- David Evans
- Andy Gardner
- Nick Griffin
- George Lucas
Every week, we bring together many voices in one convenient location.
This week inside the minds of leading fund managers:
- Profiting with disruption
- Tax loss selling
- China’s A-shares
- Amazon and Whole Foods
- … and much more
How will artificial intelligence (AI) shape the Australian economy specifically and the managed fund industry specifically?
President of Capital Fund Management
Artificial intelligence and machine learning are already a fact of life. In Australia, as in the rest of the world, this subset of applied mathematics, which uses algorithms to learn from and make predictions using data, is already being used in investment management. And the world’s most advanced technology companies are also pouring billions of dollars into the area.
The rise of artificial intelligence and its role in investment management has in part been made possible by the exponential rise in the amount of data available for collection and analysis. Indeed, words struggle to convey its sheer volume. On any given day at CFM we collect and analyse over 2.5 terabytes of information, mainly in the form of market data. That’s equivalent in scale to a typical academic research library.
Growth in the quantity of data we have access to has been exponential over the past few years, and this trend will undoubtedly continue. This means that – in the short term at least – firms and people comfortable working with big data sets will have a clear competitive advantage. And over time, what we see now as a competitive advantage will in fact become a prerequisite to compete at all.
In the 26 years our firm has been operating we’ve witnessed the end of many technologies once thought to be at the cutting edge of technology, including the fax machine, the telex and even the telephone as a means of placing orders. As a result, for the companies which had the foresight to see its inevitable rise and to invest in it, technology has revolutionised both the collection and analysis of data, as well as the interaction with the local and global exchanges which underpin financial markets.
All of this means that the asset management firm of the future is likely to more closely resemble a technology firm than it ever has before.
At CFM, we use servers to collect data and powerful computers to execute trades and monitor the impact of our trading on the market. But this doesn’t mean that the future is simply a case of the march of the robots. The people we hire, from academic backgrounds like engineering and science, will become ever more prevalent in asset management. And the emphasis will continue to shift from firms full of people trying to read the markets to people who can manage and build the machines and algorithms that trade the markets.
What’s important, however, is to understand that systematic trading isn’t something to fear. And it isn’t something new. After all, index investing is actually the simplest and oldest quantitative strategy around. And the reality is that more and more investors are beginning to acknowledge that, on average, they are better off tracking an index than giving their money to an active manager, which is a fairly monumental shift in thinking, given how long active management has been seen as being synonymous with asset management.
Executive Chairman of Evans and Partners
Companies with access to large amounts of data combined with advanced intelligent learning are creating a new wave of disruption across the globe. The most significant developments in Artificial Intelligence (AI) are coming from companies already experienced in other forms of disruptive technologies. Facebook, Amazon, Apple, Microsoft and Alphabet (the parent company of Google) all focus on AI.
AI has massive potential to improve costs and productivity and spur innovation in products and services. For example, the healthcare sector is benefiting through improved diagnosis, drug discovery and decreasing procedural costs. But with the gap established by early adopters growing and their advantages carrying into the next round of disruption, companies that have not mastered disruptive technology face a very difficult task to catch up.
For the managed fund industry, AI can improve research and analysis and change costs structures. Hong Kong based venture capital fund Deep Knowledge has already appointed Vital – an AI programme – to its board to make investment recommendations.
From an investment manager perspective, the challenges to the Australian economy are focused around which existing businesses and industries will continue, perhaps in new directions, and which will become relics. Investors need to bring these considerations to the construction of their portfolios. This is one of the reasons as an investment manager we established the Evans & Partners Global Disruption Fund; to provide access to these large-cap global stocks that are already disrupting. Maintaining a traditional equity portfolio offers little hedge against the scenario of more disruption and dominance from the likes of Facebook and Alphabet. We also suggest investors make sure they have access to experts well versed in the thematic of disruption which is why we have very experienced industry leaders, including David Thodey, Richard Goyder and Paul Bassat investing with us in this strategy.
Global Equities Investment Manager at AMP Capital
Artificial Intelligence (AI) is going to change the landscape in many ways including those we don’t even understand yet. The impact will be powerful for the Australian economy and beyond. We have been through various industrial and technological revolutions before and this next phase should be no different, with the information age resulting in rising living standards, longer life spans and lower crime rates.
In relation to the application of AI to investing, machines will almost certainly replace humans by radically automating middle and back offices, resulting in improved operating efficiency and lower overall costs. Machines will also likely be more successful than humans at capturing short-term mispricings and will more efficiently replicate highly systematic and quantitative techniques.
The good news for humans is that the majority of future company value is very difficult to reduce to a simple set of numbers. A deep understanding of a company’s intangible characteristics such as its competitive advantages, innovation capabilities, capital allocation, culture, technological competence, and attitude to innovation and governance is required to generate long-term wealth creation and avoid value destruction.
AI will only ever be as useful as the usefulness of the question it is trying to solve. No matter how much information, data, machines and AI we have, good process will still be critical to deliver superior investment outcomes and a human is most likely to be an architect of that investment process.
It is much less certain how greater adoption of AI will affect market efficiency. The irony might be that as markets become more mechanised, they will also become more volatile. This is because markets will react faster to changes, which will be amplified by machines trying to extrapolate second, third and fourth order effects as the machines try to out compete each other for what is not ‘priced in’. Momentum further leverages the extrapolation. As investor Naval Ravikant says (and I agree with): “We should see bubbles form faster, pop more quickly… This idea that the future is going to be very smooth and linear and predictable is a human illusion.”
Chief investment officer at Munro Partners
In layman’s terms, Artificial Intelligence (AI) is simply taking volumes of unstructured data and plugging it through a ‘big computer’ to give the user a predictive outcome that enhances their experience.
The simplest forms today would include your dynamic newsfeed on Facebook, predictive shopping results on Amazon, or even Google maps highlighting the time your daily trip to work will take, before you asked for it.
In its full form AI is likely to penetrate all businesses globally providing advertisers, consumer product companies and even industrial companies with better outcomes and insights for the same dollars spent.
From an investment perspective, if AI provides better, smarter outcomes for the same dollars spent then companies will now be in an ‘Arms Race’ to implement AI as quickly as possible to all their business practices. We see this as likely to result in aggressive spending on computers, i.e. building the network and the infrastructure to drive the ‘big computer’ and secondly strategic acquisitions of ‘data’ which is the fuel from which AI drives its outcomes.
Real world examples of this in Australia would include a mining company moving to autonomous mining vehicles to allow computers to solve for more efficient movements. On the data side, some would remember US credit bureau Equifax paying a high multiple for Australian listed peer Veda as it controlled valuable Australian datasets that can be leveraged further in the future via AI processes.
In terms of the managed funds industry, the obvious ‘data’ that can be harnessed is index data and we would expect AI to help drive a range of smarter index products, be it smart beta / smart alpha products that are likely to further push the penetration of index products into the marketplace. Ironically, as an active manager, we have sought to benefit from this by investing in key listed index providers such as IHS Markit, S&P Global and MSCI and see them as key winners in the ‘data’ space.
Managing Director of Instreet Investment
Artificial Intelligence (AI) is already impacting the managed funds industry. This is evident in a recent announcement from Blackrock, one of the largest fund managers in the world, which stated that it will replace a large proportion of its active managers with AI. We believe this is just the beginning and many other managers will follow as technology and know-how gets cheaper and more widespread. This change will impact how we interact with our apps and where we talk to our phones more than fingering them.
It will also eventually provide access to cheaper professional services like doctors, lawyers, financial planners, accountants etc. as AI becomes more prevalent and cheaper and offers more expertise than these professions currently offer. Just remember if everyone becomes unemployed – as fear mongers would like us to believe – then there is no one to buy the AI services and therefore no economic incentive for firms to introduce them. As AI enters into our economy mainstream, we need to maintain this balance.
Defying Disruption: Three Ways to Profit
The arrival of disruptive market forces by definition jeopardises the status quo and the firms that belong to it. Yet disruption is not always the death knell it is made out to be. Rather, it can provide investment opportunities for those willing to adapt to the pace and mode of change. AB Global provide three examples of businesses that have thrived in the face of disruption.
Tax Loss Selling
Tax loss selling is the practise of selling stocks before EOFY in order to offset realised capital gains tax. Such selling is both predictable and largely disconnected from ordinary market dynamics. This might be the closest thing in the finance world to a free lunch. Clime Investment Management explore this annual mass selloff and, through an analysis of three different equities, illustrate how it can be used to the advantage of savvy investors.
A-Shares: All Quiet on the Eastern Front
China’s A-shares (the collective term given to shares on the Shanghai and Shenzhen stock exchanges) have historically been quite volatile. Two years ago, for instance, they grew 80 percent over six months before losing 43 percent of their value over the following 11 weeks. Breaking from this tradition, A-shares are now enjoying an unusual period of stability, leading AB Global to conclude that “risks abound… but the bigger risk for investors may lie in ignoring this market altogether.”
DISSATISFIED CUSTOMERS WILL BE KEY TO AMAZON’S GROCERY SUCCESS
Amazon raised more than a few eyebrows when it recently announced its acquisition of Whole Foods, an American high-end supermarket. This move has sparked a great deal of speculation as to the strategic rationale. Roger Montgomery’s Daniel Wu believes it is part of Amazon’s attempt to instil in its customers a sense of retail dissatisfaction, not in their Amazon experience but in the traditional businesses Amazon is in competition with. As Wu reflects, “It wasn’t until Amazon opened its online bookstore did customers realise that they were dissatisfied with the prices and selection at brick and mortar bookstores – and eventually extended to two-day free shipping on tens of millions of items.”
Global Matters: All aboard the new Silk Road
President Xi Jinping attracted widespread media attention when in May he announced China’s economic plan, One Belt One Road (BRI). Drawing inspiration from the original Silk Road trade routes that once characterised the region, the plan [ostensibly] serves as a blueprint for China’s economic linkages in the 21st century. 4D Infrastucture breaks down this development by providing some historic context for the move followed by an explanation of its implications for Australia and the region generally.
No Shortcuts in Credit Research
It’s overly produced, but this video by PIMCO nonetheless offers a fascinating ‘behind the scenes’ look at the credit research process, coloured by an anecdote about investing in pipelines during a slump in oil prices.
If This is Failure – Give Me More
Japan’s story of the past two decades has been one of contradiction: while it has been plagued by deflation, it also evokes images of innovation, civility and social progress. In this context, Morphic’s Jack Lowenstein takes us through his initial impressions since beginning a research trip to Japan, concluding with two key insights: (1) “When no one expects inflation, most corporate executives think this is ‘as good as it gets’, and stock prices seem cheap, risk of disappointment seems low”; and (2) “Even if the pessimists are right, money can be made by pairing long positions in better companies against short positions in worse ones in the same industry, trading on similar multiples.”
Has foreign capital changed the face of Australian real estate?
The Australian real-estate market has traditionally moved in cyclical lockstep with the domestic growth rate. In recent years, however, Australian property has grown strongly despite a lacklustre overall growth rate. Brian Reid of Cromwell Capital thinks this departure might be the sum result of foreign capital inflow and higher property yields.
How much risk is there in my passive strategy?
Adding his two cents to the active vs passive debate, Robert Swift of TAMIM Asset Management points out some of the under-appreciated cons associated with passive management styles including sector bias and often questionable investment criteria.
Ten years on, what have we learnt?
It has been ten years since we experienced the great recession, or narrowly avoided depression, whichever way you want to look at it. Asset prices have performed remarkably well during this period, the combined result of government stimulus, accommodative monetary policy, and investors reaching for yield. Yet as Jonathan Rochford of Narrow Road Capital posits, these drivers are set to reverse.