AI and the new age of portfolio management
THROUGHOUT history, every generation believes that it has lived in innovative times, yet, every generation has brought its own innovation and change to the table. The evolution of communication devices from the phone booth to pagers and finally to the smartphones we have today is one great example.
In the financial sector, innovation has been driven by the proliferation of data and technological advancements, such as the widespread adoption of artificial intelligence (AI), which has brought about significant disruption to businesses, people and investment models of organisations. For the everyday investor, it has transformed the solutions that they can rely on, and how they can take control of their financial lives.
The new age of investing and managing finances
Algorithms and quantitative models are no strangers to the investment community. As AI and machine learning continue to make inroads, this has opened up new possibilities to identify patterns and optimise portfolios.
Similarly, asset managers are looking at ways to leverage algorithms and quantitative models to come up with portfolios or fund strategies, which may complement some of their existing active strategies. Robo-advisers are also a popular choice for many investors, as using the platform allows them to rely on algorithms to optimise and enhance portfolios for the best returns.
We are seeing a new age of investing and managing finances where investment processes are much more simplified. Thanks to AI and machine learning, individual investors, portfolio managers and the wider investment community can now parse huge volumes of data easily, and identify trends to help them navigate the challenging markets today and make informed decisions – an otherwise time-consuming process of knowledge gathering.
Taking matters into your own hands
With the advent of technology and the vast amount of resources online, some investors may look towards managing their portfolio or building one themselves, possibly as an exercise to be in control of their own investments or to save on management fees that come with hiring a professional.
On the flip side, managing a portfolio on their own also calls for more effort that must be put into understanding the market, as well as recognising and avoiding common investor pitfalls such as recency bias as well as knee-jerk reactions to market developments. This knowledge takes time to accumulate, and is often done through a process of trial and error, to get fully acquainted with the ebbs and flows of market movements.
Opinions vary on when one is ready to start managing their own portfolio – some feel that they are ready only when they can manage their day-to-day finances, while others feel it is best to start only on the back of an emergency fund that they can fall back on, before they put capital into less liquid investments. There are also different considerations for people across different stages of life – some may be looking to accumulate wealth, while others wish to leave a legacy behind for their future generations.
Nonetheless, it is paramount that one understands their current financial standing, risk appetite as well as have a plan that outlines clearly their financial goals, in addition to the amount of capital they plan on putting in. This serves as a guideline for investors to rely on as they begin to build their portfolio.
Investors need – and want – the human touch
Despite the surging popularity of robo-advisers, they have yet to replace human advisers entirely. Research from Nasdaq showed that while large wealth management firms offer robo-adviser services, their human advisers continued to gather billions of dollars more in assets – underscoring the importance of the human touch for many clients. Our recent research also found that 72 per cent of Singaporeans prioritised face-to-face interaction with their financial consultants.
When it comes to portfolio construction, there are critical aspects to consider: risk-profiling, goals, benchmarking and regular performance reviews, among others. Simple risk-tolerance questionnaires, which often serve as the core of client-discovery processes for robo-advisers, may not get to the heart of understanding an investor’s financial needs and goals in their entirety, and how their investment portfolio works for them in the context of their financial circumstances.
When we fall sick, it is best to trust a doctor rather than just research our symptoms online. Similarly, seeking an expert’s guidance when it comes to investing can maximise our investments and ensure the best outcome.
Portfolio managers can adapt nimbly to market movements and provide personalised advice based on a deep understanding of one’s financial needs and risk appetite, as compared to an algorithm in digital solutions which may not demonstrate the same level of understanding. Human advisers also help investors to stay on track for their longer-term objectives, and help navigate common investor biases, including loss-aversion bias or recency bias.
Potential to create real impact from a hybrid approach
Fundamentally, digital solutions and the human touch are complementary, and should be synergistic in nature. In the new age of AI, there is immense potential to create real impact within the investment community through the provision of deeper insights that can complement traditional analyses done by portfolio managers and financial advisers.
One big use case is the potential of the hybrid approach in sustainable investment decisions. AI can help with the collection and analysis of copious amounts of information more than ever before. This means that it would be a lot easier to combine data sources in real time, capture sentiment and most importantly, identify missing or skewed metrics, which can help portfolio managers and financial advisers gain a fuller picture when accounting for environmental, social, and governance (ESG) risks and opportunities for investors.
From there, portfolio managers and financial advisers can capitalise on their experience in the industry to make informed decisions on sustainable investing, as well as accurately measure ESG criteria in their portfolios – potentially improving the entire ESG-related decision-making process.
The writer is head of division, Asia and Middle East portfolio management, at St James’s Place
