While passive investing, responsible investing and real and alternative sources of return will be key global investment trends this year, artificial intelligence (AI) is going to emerge as the most dominant theme for asset managers around the world.
This is the view of the director of investments at Old Mutual Investment Group, Hywel George, who says: “While there may be some scepticism as to the extent that AI will change our day-to-day lives, it could well turn out to have the most profound and fundamental impact on the way we work and conduct ourselves in all aspects of our lives over the coming decade.
"From an investment perspective, the way asset managers integrate AI into the approach they use to managing money is likely to be fundamental to their future success," he adds.
George highlights that for asset managers “cognitive augmentation” in particular will be an important factor in applying AI.
“The human element is still a crucial component. We don’t believe that AI will be a case of machine-only, and the winners are most likely to be those who optimise the relationship between human and machine,” he says.
“In our business, we have collectively identified five key areas where AI will directly impact the way we manage our clients’ assets,” he explains. These are:
* Data sources. “We have to consider that the data we need to source will evolve - news scrapes, management emotion measures, satellite imagery - and our ability to clean and curate that data will be key.”
* Data interpretation. “AI will be able to help us interpret this data and look for themes that will aid us in finding new ideas.”
* Screening. “AI will help us to design better stock and sector filter screens to identify those companies with the characteristics we favour,” George says.
* Portfolio construction and risk management. “AI can help to identify risks that were previously hidden.”
* Company research. “It will also help us in stock-specific, fundamental research, finding anomalies that beg questions, and helping dig into issues where we would like more information.”
Rise of passive
George says that passive investing will also play front and centre in the 2019 investment landscape.
“Passive or index investing will likely continue to gain support this year in line with global trends. However, we believe there is still a firm place for active investing to make up a substantial component of the mix in a portfolio.
“Ultimately, the right balance of the two is the ideal solution, with passive investments enabling investors to manage their fee load, while active managers’ stock picking can add value relative to the market,” George says.
George also points out that investors should look to keep adding real, alternative sources of return outside of regular equity and bond portfolios. This includes real assets, such as infrastructure investments, real estate and agriculture, as well as private equity.
“Globally, around 20percent of the assets of the largest pension funds are now invested in alternative assets in some form or another, whereas in South Africa, alternative investments comprise a mere 2percent of institutional assets.
“So we have a lot of work to do to increase that exposure locally to give investors exposure to the long-term, premium real returns they can offer.”
The last and by no means least important investment theme that George expects to see grow in significance is responsible investment.
“People’s perceptions are shifting worldwide, with many becoming more mindful of sustainable investing. With around $80trillion of global assets under management, the investment industry has great potential to influence decisions and practices relating to sustainability,” he says.
“Encouragingly, ESG funds (those taking environmental, social and governance factors into account) have really taken off globally, with an almost exponential rise in flows over the past few years.
“Investors are increasingly realising that there appears to be no trade-off between making sustainability an investment priority and achieving competitive returns,” says George.
“The fact that an ESG strategy can add significant alpha makes intuitive sense because integrating ESG into investment decisions means you generally invest in quality companies that make better long-term decisions and thus deliver more sustainable returns over time.”