Monday Morning Memo: Will AI be a Game Changer in Portfolio Management? | Lipper Alpha Insight | LSEG (2024)
A lot has been said about the future perspective for portfolio managers with the increasing possibilities of artificial intelligence (AI). Sometimes I get the impression that AI will replace more or less everyone in asset management and especially in portfolio management. But can such an assumption pass a reality check?
It is true that a lot of work in portfolio management can be taken over by AI, but I don’t think that AI will replace portfolio managers at all. In fact, the fund management industry has been using algorithms for decades to determine valuations of markets and securities. These algorithms often use data which have been generated by tools using natural language processing (NLP) to extract the data from company reports and media reports. In addition to this, many fund management companies have developed quantitative tools to evaluate the attractiveness of markets and asset classes, which are used to steer the asset allocation and risk profile or the respective portfolios.
That said, most of these portfolios still have a human interface (portfolio manager) who is judging the outcome from the quantitative models, as some results, especially when so-called black swan events appear, may not make sense and can lead to misinterpretations and therefore wrong decisions by the model. Therefore, it is no surprise that asset managers employ data scientist to secure a high data quality by cleaning the data generated from the NLP tools and to keep the models up to date. Especially the latter is another task which currently can’t be done by AI itself, since the evaluation of the eligibility of single data points within the selection process is somewhat depending on the wider understanding of what is going on in a given economy. Even as AI has currently some flaws, one needs to bear in mind that we are currently at the starting point of a wave of AI-related innovations.
With regard to this, I do believe that AI will become much better in identifying malicious data and might be able to identify the best measures to identify the securities which fit the approach of the fund manager best. This means that fund managers and analysts will appreciate AI-based solutions, as these new tools will perform basic, as well as somewhat advanced tasks in the areas of quantitative research and portfolio construction for them. The reduced quantitative workload may enable them to perform more in-depth qualitative work, which hopefully will lead to an outperformance of the respective fund compared to its benchmark.
To answer the question raised in the headline, I believe that AI will be a game changer in portfolio management as the vast majority of quantitative tasks will be performed by AI in the future, but I don’t think that AI will replace analysts and portfolio managers, since active management is still considered rather an art than a science.
The views expressed are the views of the author, not necessarily those of LSEG.
It is true that a lot of work in portfolio management can be taken over by AI, but I don't think that AI will replace portfolio managers at all. In fact, the fund management industry has been using algorithms for decades to determine valuations of markets and securities.
AI acts as a powerful decision support tool for portfolio managers. By providing insights into market dynamics, competitor behaviour, and industry trends. AI enables managers to make well-informed decisions aligned with the company's strategic objectives.
It's unlikely that AI will replace financial advisors and financial planners. Investment is still a human activity, driven by emotion and uncertainty, which means that there are no “right” answers that a computer can solve.
AI's biggest use case is in risk management where it can give managers tools to improve compliance and risk management functions while automating data analysis, including external data, to better anticipate major market events and scenarios.
Among the 95% of senior leaders who report that their organizations are currently investing in AI, the number of companies investing $10 million or more in the technology is set to nearly double next year to 30%, up from 16% currently investing at that level.
The short answer? Yes. Using this AI investment analysis tool you can now have a top down investment strategy by being able to analyze all your investment portfolios in one, centralized location.
The future of portfolio management will involve integrating ESG factors into the decision-making process and offering investment products that align with ESG principles. The availability of vast amounts of data, often referred to as big data, has had a significant impact on portfolio management.
AI won't replace product managers, but it will enhance their jobs by taking over some routine tasks, freeing them up to focus on high-level strategic work.
While AI technology may be rapidly transforming the financial sector, it is highly unlikely that human financial advisors will become obsolete anytime soon. The future of this industry lies in a combination of AI-driven solutions and human expertise — the ideal blend of tech-powered precision and personalized advice.
AI is revolutionizing the finance industry, and financial analysts must embrace its use to stay competitive. While there may be concerns about job displacement, remember that AI is here to assist and enhance the work of financial analysts, not replace them entirely.
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