Views from the CIO: In a field of dreams of AI, will IA revolutionize the asset management industry?

Back in February of this year, I attended one of my favorite CIO roundtables in New York called U.S. Institute CIO Roundtable. This year, most of the presentations highlighted the applications and possible disruptions of Artificial Intelligence (AI) in the asset management industry. While it was interesting to hear about the different applications of AI, most of the presentations came across in what I call the “Terminator” style or “man versus machine.” Since the movie the Terminator came out a while ago, I don’t believe I’m giving away the ending: humans find a way to defeat much stronger and faster machines!

In the world of advanced technology, however, I see things a bit differently. For instance, the most helpful contribution of AI to the asset management industry is in intelligence augmentation (IA). In my view, IA is more like the 1970s science fiction and action television show, “The Six Million Dollar Man” (my age group would remember), where bionic implants can make a human stronger and smarter. That said, I believe there’s no reason to fight the machines, as in the Terminator. In reality, they will not take our jobs away, but make us more efficient.

Talking with other attendees at that conference, I found that many fundamentally-oriented CIOs and portfolio managers didn’t believe that machines could replace or replicate their research insights.

Even one attendee used the analogy that using machines to invest is like using a GPS app on our iPhone. Since we’ve become so dependent on these apps, maybe we’re were worse off and have even lost our sense of direction. I tend to agree with his analogy. It’s not the machine’s fault for us becoming technologically dependent. Rather it’s the human fault because they rely too much on the machine and loses their judgment when the machine in a rare instance is giving bad advice.

That is why I believe there is a more immediate opportunity for IA to bring efficiencies into our industry. Specifically, at Principal Global Equities, we have been using technology and quantitative-based tools since 2001 to make our “humans” better investors. These are stock selection tools or risk management tools used to tilt the probabilities of outperformance in our favor. They also function as information efficiency tools to ensure our analysts and portfolio managers are focusing on relevant information that they can use to make better investment decisions.

The next generation of our tools will also use IA . For example, developing a “virtual analyst,” “virtual portfolio manager,” “virtual risk manager,” and “virtual trader” to replicate many of the lower-order tasks currently performed by these professionals. I believe that allowing them to focus their intelligence on tackling higher-order problems for our clients by replicating their workflow will only make them better analysts, portfolio managers, risk managers, and traders.

With these tools, everybody can do their jobs more effectively and efficiently. For example, since we implemented these systematic investment decision-making tools in 2002, our equity assets have more than quadrupled and we’ve done it with roughly the same number of investment professionals as in 2002. It’s been a remarkable balance between efficiency and effectiveness to say the least. That said, IA is no longer just a field of dreams, in central Iowa, it’s already a reality.

Happy investing!

 

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