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Robot versus human in investment industry

Automation trend: the role of robots in the investment industrywas discussed at the CFA Conference in Philadelphia

“Everyone has a plan ‘till they get punched in the mouth.” - Mike Tyson

I’m back from what was an excellent conference in Philadelphia, the home of Rocky. Like Rocky’s epic battles and fights, the CFA conference offered up a few great matches that permeated the entire conference. I’ll discuss two. In fight one, the robots squared off against the humans. In the second bout, it was passive versus active management.

Robot versus human

The concept of automation and artificial intelligence integration within the realm of finance was prevalent throughout the conference. There was a palpable level of concern or at least acknowledgement that the human’s fight against technological obsolescence would be a long and difficult one. To survive, human investment professionals will need to learn to bob and weave — ducking and blocking numerous punches which technology will throw at them. Two presentations I attended showcased this fight well.

The first was a presentation by Joe Davis, the head of Vanguard’s investment strategy group. He suggests we are at an inflection point on the changing nature of work. The scope and the speed of change are both immense. Machines are not just doing programmed tasks but also learning.

Dr Davis outlined the general problem by quoting the Frey and Osbourne (2013) study The Future of employment: How susceptible are jobs to automation? The study suggests that by about 2025, 47 per cent of jobs in the US, 69 per cent of jobs in India and 77 per cent of jobs in China will be at risk of being automated through technology. Shocking when one considers the enormity of this opponent.

Dr Davis, however, ended, with a more positive tone. He suggested that a number of “tasks” will ultimately be automated and humans will be replaced in numerous endeavours but we will simply adapt what we are doing and use technology more as a tool.

In the future your Emotional Quotient will be far more valuable than your Intelligence Quotient. In other words soft skills and social skills will be far more meaningful in a world where lots of technical aspects are run by machines. As an example think of your favourite teacher: he/she was the best not because he/she knew the most but because they inspired you the most. Only humans can inspire — machines cannot. Uniquely human tasks will be increasing in demand. From an investment perspective, the winner-takes-all economy will continue and inflation is likely to remain historically low. A second talk by Scott Klososky, the founding partner of Future Point of View, talked about digital transformations and the impact it’s having on finance and investing. He too stressed the rapid speed of technological advancement and went as far as suggesting humanity will change more in the next 20 years than in the previous 300. He introduced a “Humalogy Scale” suggesting certain tasks will be less affected due to their more humanistic tendencies versus some process automation or data driven functions that will be taken over by robotics or artificial intelligence. He foresees the coming “Age of Entanglement” where the repercussions on our future are staggering.

At one point he mentioned that there will most assuredly be higher revenues per employee due to automation and singled out the insurance industry as one which is likely to see this soon. This disruption will lay waste to a series of companies who do not adapt and embrace technologies that are evolving exponentially.

Passive versus active

This is a real slugfest. The Mike Tyson in this match is Vanguard. Jack Bogle, Vanguard’s founder gave a talk on the industry and the effect passive indexing is having. Active mutual funds still account for about $10.5 trillion in assets versus $5.6 trillion in index funds. Outflows since 2008, however, have amounted to $1.3 trillion from active management strategies while inflows into indexation or passive products has amounted to $1.1 trillion, a delta of $2.4 trillion. With active management on the ropes it’s important to differentiate between true active management and the value of an adviser. On the former, Thomas Howard, PhD, gave a talk called The Behavioural Financial Analyst which in part mentioned what true active management involves. In the presentation, Dr Howard noted numerous studies which denote factors for successful active management.

Desirable active equity characteristics, for example, include firms with assets under management of $1 billion, high conviction and concentrated positions and high active share or differentiation from the benchmark. In summary, active management can work when it’s really active management and not “closet indexing”. It’s pretty hard to beat a 500-stock index, for example, when you own 400 of the stocks and charge high fees.

Maybe the other point worth noting is something I wrote about before and that is the value of an adviser outside of just beating benchmarks. Morningstar’s David Blanchett, PhD, presented on Alpha, Beta and Now ... Gamma. The presentation underscored numerous ways how an adviser can add value to the investment process such as implementing a dynamic withdrawal strategy, using liability-relative optimisation, advocating staying invested for the long-term and funding the appropriate goal. All seven of the ways to add value discussed in the presentation amount to about 2 per cent “gamma” or additional return overtime — well worth a nominal fee.

Like most great fights these two cards of humans versus robot and passive versus active will be prolonged battles. We are likely only in the beginning rounds of these struggles and it will be a bloody match. The losers will most assuredly be knocked out and remain down for the count. You never know if you’ll get punched in the face by change. That’s why it’s important that all financial professionals retrain and continually learn to remain in top fighting shape.


Scott Klososky: Future Point of View (goo.gl/TDlxwm)

C. Thomas Howard, PhD: Why Most Equity Mutual Funds Underperform and How to Identify Those that Outperform (goo.gl/FvG1xx)

David Blanchett and Paul Kaplan: Alpha, Beta and Now … Gamma (goo.gl/Bh4wAM)

Nathan Kowalski CPA, CA, CFA, CIM is the Chief Financial Officer of Anchor Investment Management Ltd and the views expressed are his own

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