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Diary of a Fund Manager - Question Spotting - 11.11.19

This week’s Diary is mostly about the impact of artificial intelligence on investment, together with a little bit about the challenges of being a farmer during times of uncertainty.

Anyone casting a cursory glance at the indices would conclude that last week was rather ordinary. Equities ended higher with bonds and gold down. In the binary world of short-term trading it pays to be risk on at the moment. Talk overwhelmed silence as the general election campaign started in earnest.

On the investment front, those who just a few months ago queued up to explain why an inverted yield curve[1] foretold the coming of recession are now telling all who will listen that the curve has dis-inverted and we can relax. Next year will be just fine. Back-fitting stories about the global economy to short-term market movements isn’t a productive use of time. Reality is far more complicated than one indicator. It is, however, good to hear that the debate about 2020 is becoming slightly more optimistic. Hence recent market moves, both at a headline level and below the surface. The book of investment management is, as ever, a good read.

My week was book-ended by travel. Up north at the start and in Germany at the end. What did I learn that is relevant to the business of investment? Well, making a living from farming is always challenging, but particularly so at present. Lack of certainty about trade with the EU and the shape of the next government add to the usual mix of price volatility and the weather. Listening to those trying to plan next year highlighted that my world is straightforward by comparison. There are many ways in which investors try to measure confidence, but the harsh light of reality is so much more informative.

Over the last few years I have been a regular attendee at the NextGen Artificial Intelligence conferences. The fifth conference was in Frankfurt last Friday where, in addition to listening, I was also asked to speak about the impact of AI on the investment management industry.

When I first decided to go to Germany in early November I assumed that I would be in the foreigners queue at passport control, but yet another Brexit delay eased my passage. British Airways from London City Airport was a breeze compared to those who chose Lufthansa which was on strike. A little bit of good luck always helps.

At a gathering of the speakers the night before there was much to discuss, but what struck me is that investment is a world without borders and how difficult it will be for governments to close the borders. To illustrate my point, I was sitting next to a Spaniard married to a Russian who now works in Germany, an Argentinian who lives in Madrid, and a Canadian who is now based in the US but whose parents were immigrants from Hungary and Chile. They were polite enough to speak to me in English, but did occasionally slip into their own versions of Spanish. Our host was an American who has lived in Munich for 25 years.

Curiosity took me to the first of these conferences not that long ago. Could AI be the Philosopher’s Stone that will turn lead into gold? Much has changed in the intervening years as theory has been turned into practice. It is estimated that there are now over 30 funds that are run on an AI basis with total assets in excess of $1 billion.

Investors are committing modest amounts to what remains a very small part of the investment management industry, but judging by the numbers in the audience, the level of interest is rising. Rather than try to solve the meaning of everything, the practitioners are using AI to add value in small niches. It was acknowledged that much remains beyond the capabilities of machines including modelling Donald Trump.

Critically, and this resonates with my scientific education, it is asking the right questions that matters. After that useful answers flow which, in investment management terms means, adding value. The debate as to whether the machine alone is better than man plus machine continues, but the consensus remains that a hybrid of human intelligence and artificial intelligence still has the edge. AI is also having an impact on how investment management businesses manage themselves. Understanding client preferences, organising advisers and reducing bureaucratic drag all lend themselves to the imaginative uses of AI.

It was an interesting and challenging day with much to reflect on. I gave up feelings of imposter syndrome years ago, but I must admit that as I headed to the lectern I had some doubts about what I could add to the debate. Six out of the ten speakers before me had mathematics based PhDs, two had done a Gates/Zuckerberg and dropped out of higher education to pursue their visions of the future, and one was a professional bassoonist who had made enough money playing online poker between performances to set up his own AI-based currency trading fund.

As a fully paid up practical investor my opinions were, at a bare minimum, regarded as a useful source of questions to be worked on. At one point I quoted Keynes writing about Newton which seemed to catch the attention of the audience; ‘he could hold a problem in his mind for days, weeks, months until it surrendered to him its secret.’ Artificial intelligence linked to the exponential increase in computing power will allow us to solve problems beyond even Newton’s capabilities.

No Diary next week. 

[1] If you plot short-term interest rates and long-term interest rates on a chart, you get the yield curve. A healthy economy shows an upwards sloping curve, hence the panic when the curve ‘inverts’ and the curve turns downward sloping. There are technical reasons why it might not matter this time, but we won’t get into that.

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