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Over the coming decade, artificial intelligence (AI) will transform our lives – for better or for worse. Mark my words, its impact will be on a par with the invention of the light bulb, the combustion engine, the personal computer and more recently the internet and iPhone.
Speak to some economists and they argue that AI will be a resounding force for good. It will supercharge economic growth on the back of massive productivity gains as business processes are streamlined and many jobs – and tasks – currently done by humans are carried out by all-singing, all-dancing AI tools.
Others argue that AI is the equivalent of aggressive knotweed and should be curbed before it gets out of control, endangering democracy through misinformation, misrepresentation and misuse.
Whatever your personal view – and it’s currently a hot topic for debate in my local pub – AI is here to stay. And its role in society will only grow as it becomes more sophisticated and ‘intelligent’ – moving on from providing detailed answers to questions asked by 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 conversation online – are just the beginning. You ain’t seen nothing yet. All aspects of our lives are going to be touched by AI – including the way we go about building long-term wealth.
Finger on the pulse: Whatever your personal view, AI is here to stay
WILL AI INFLUENCE THE INVESTMENTS WE HOLD?
Although it is 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 run by exceedingly well-paid investment experts, there could come a time when many are managed instead by intelligent AI tools. Hello robots, goodbye thousands of mediocre fund managers.
And if not run by AI, they could be assisted by it. So, the potential stocks that a manager puts inside their fund could be drawn from a list compiled by AI, rather than an investment analyst poring night and day over company accounts and independent research in search of investment gems.
The implications are huge. More transformative than when index-tracking funds came on the scene in the late 1980s, providing investors with the opportunity to enjoy returns in line with the market – rather than be beholden to the competence (or incompetence) of managers running their funds.
AI-managed funds could – and it is a big could – offer investors the equivalent of investment elixir. That is, investment returns consistently better than what an index-tracker can deliver and maybe (a big maybe) performance superior to what the best ‘active’ fund managers – with years of experience behind them – sweat from their carefully crafted portfolios.
Fanciful? A pipe dream? Maybe, but an experiment conducted by financial comparison website finder.com indicates that a fund portfolio put together by AI has the potential to produce superior investment returns.
HOW A ROBOT PORTFOLIO FARED IN A TEST
Website Finder asked AI tool ChatGPT to put together a portfolio of ‘high-quality’ listed companies, based on the investment principles that mainstream fund managers commonly use to identify winning stocks. These included homing in on companies with low levels of debt, a record of sustained growth and a competitive advantage over immediate rivals.
ChatGPT came up with 38 stocks to build the portfolio around, most listed in the United States. The likes of tech giants Amazon, Meta and Microsoft, as well as familiar brands such as Coca-Cola, Johnson & Johnson and Visa.
The website then pitted this portfolio against one comprising ten of the UK’s most popular investment funds – a mix of index-tracking funds (both UK and global), mixed equity and bond funds and one of the country’s most popular actively managed funds, Fundsmith Equity.
This £23 billion fund, run by investment legend Terry Smith, has delivered average annual returns since launch in November 2010 of 16 per cent – hugely impressive on any level. The equivalent annual return from the MSCI World index over the same period is 11.1 per cent.
Since Finder launched its experiment in early March, ChatGPT’s portfolio has come out on top, delivering an overall return of just short of 4.7 per cent. This compares with a near 1.9 per cent loss recorded by the portfolio of ten funds.
The results prompted Jon Ostler, chief executive of Finder, to state that ‘it won’t be long until large numbers of consumers try to use it [ChatGPT] for financial gain’.
More pointedly, he added that fund managers ‘may be starting to look nervously over their shoulders’. A supporting survey conducted by the website indicated that nearly one in five UK adults would ‘consider getting financial advice’ from ChatGPT.
Of course, Finder’s research should not be viewed as definitive – the results are based on too short a time period to be considered anything other than interesting.
As one well-known fund manager told The Mail on Sunday, the research was ‘several years too short’ to draw definitive conclusions from.
Yet, the experiment provides us with a glimpse into a future where AI funds could become an established part of the investment galaxy, vying for investors’ money alongside index-tracking funds and best-in-class actively managed funds.
HOW ROBOTS COULD WEAVE THEIR MAGIC
‘Undoubtedly, fund management is one of those areas where AI may well have a significant influence over time,’ concedes Jason Hollands, managing director of fund platform Bestinvest. He says many investment groups already run ‘quant’ or ‘systematic’ funds where the portfolios are constructed on the basis of quantitative analysis of financial data conducted by sophisticated computer programmes. So the jump to AI would not be a big one for them to take.
But he believes there are hurdles to overcome, the biggest being a regulatory one. ‘The fund management industry is rigorously regulated given it is tasked with managing people’s long-term life savings,’ he says. ‘But would a fund managed by a thinking AI machine restrict itself to rules drawn up by human regulators? Allowing AI to run an investment fund would carry significant risk for the investment company if it breached City regulations.’
John Moore, a senior investment expert at wealth manager RBC Brewin Dolphin, says the fund industry will have no choice but to embrace AI – ‘industries have to adapt or face being left behind’.
Yet he believes its main role – in the near future at least – will be in the gathering, processing and reporting of information used by fund managers to make investment decisions. He says: ‘Consider the amount of information-gathering analysis undertaken to understand the effect of factors such as investor sentiment and political news on markets. All this information could be gathered in real-time by AI, enabling fund managers to make more astute investment decisions.’
WHAT FUND MANAGERS SAY ABOUT ROLE OF AI
Most investment managers that The Mail on Sunday has spoken to in recent days play down prospects of a bloody AI investment revolution – with fund managers going the way of most BT telephone boxes (taken out of service).
One 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 it 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. Fresh from attending the annual general meeting of Berkshire Hathaway in the United States – the company run 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 analyse reams of past data – useful in investment decision taking – but it cannot make judgments about the future. That’s where fund managers such as ourselves earn our crust, based on years of investment experience and knowledge.’
You would expect these individuals to fiercely defend their patch – and the funds they run will more than likely continue to thrive as a result of their individual investment acumen.
But it doesn’t mean AI will fail to make inroads into the fund management industry. Investment house Sanlam has already embraced it, using its ‘Orbit Insight’ AI tool in the running of two investment funds, Global Artificial Intelligence and Asia Pacific Artificial Intelligence.
Developed seven years ago, Orbit Insight gathers data from a range of sources – company websites, news outlets and regulatory websites – that is used by the managers in the construction of the two portfolios. Sanlam says the AI tool helps build ‘greater resilience’ into the funds.
The performance numbers suggest it is having a positive impact. Over the past five years, the £654 million Sanlam GAI fund has delivered returns of 87 per cent – better than the 55 per cent return from investing in the FTSE World Index.
For the time being, AI’s role in fund management will probably be as an adjunct rather than a main driver of investment returns. But as ever cleverer tools come on stream, AI could crack the nut that no one (not even Buffett) has yet to crack: being able to make reliable predictions of stock market returns. And in the process, it could send an army of mediocre fund managers to the proverbial scrapheap.
