I have just returned from Australia, where I was invited to be a keynote speaker at an international financial planning congress. One of the presentations focused on how computers will replace much of the investment and calculation work we do for our clients. Apparently, as humans we get in the way of better investment outcomes.
The Turing test, developed by Alan Turing in 1950, is a test of a machine’s ability to exhibit intelligent behaviour equivalent to, or indistinguishable from, that of a human.
Nearly 70 years after Turing’s ground-breaking work on artificial intelligence, it’s clear that machines can think – at least to a certain extent. Take Apple’s Siri, for instance. It is much more than a convenient tool, it’s a very real application of artificial intelligence (AI) that is increasingly integral to our daily life. Last night I even asked Siri to remind me to take the mince out the deep freeze at 7:30am tomorrow. We’re having bobotie for dinner tonight.
Machine learning is the application of AI where machines are given access to data and then can learn from it, rather than needing to be programmed by humans as to what to think about and do with the data. Every time Alexa, Siri or Google Assistant make a mistake when responding to your request, it uses the data it receives based on how it responded to the original query, to improve the next time. If an error was made, it takes that data and learns from it. If the response was favourable, the system notes that as well.
But let’s bring this back to your investments. The analysis of investment opportunities has been the domain of fund managers for decades. Over time, developments in spreadsheets (e.g. Microsoft Excel), information databases and analysis tools (e.g. Morningstar) have certainly helped to process more information in a smarter way.
But machine learning allows computers to learn on their own, independent of any boundaries, principles and constraints set by humans. It may sound like science fiction, but it’s very real and being implemented by hundreds of investment firms around the world.
AI techniques can augment human intelligence to enable investment professionals to reach a higher level of performance, freeing them from routine tasks and enabling smarter decision making that leverages the collective intelligence of machines and humans.
Successful investment firms of the future will be those that plan on incorporating AI, machine learning and big data techniques into their investment processes. There is much research that shows how sticking to an investment strategy will out-perform in the long run. The machines are not taking over (yet), but they may help us focus on sticking with the strategy while avoiding the emotional ups and downs that come with the market.
Think back to all the uncertainty we felt this time last year when many investors felt more comfortable sticking with money in the bank which gave 7.3%. Multi-asset portfolios enjoyed a better year as high equity portfolios (on average) delivered 9.1% to investors, at least 5% ahead of the annual inflation number. The mean conservative (low equity) portfolio ended the 12 months to end November 8.8% higher (net of fees). In both instances, the returns on these types of portfolios beat the performance of cash.
Having said that, the resilience of the consumer sector bodes well for the economic outlook of the United States. Research indicates that the downturn in manufacturing to gradually unwinding. Which should be supportive of investment returns in global growth assets (equities and property) over the medium term. Current dividend yields on equities remain compelling compared with the extraordinarily low yields available on long-term government bonds. Returns from dividends for most markets will exceed those from bonds, and will provide the majority of total equity returns over the next decade.
Valuations indicate that emerging market equities look particularly attractive. The US-China tariff war, however, seems to hinder an unlocking of this value and it’s unlikely that emerging markets will outperform their developed more counterparts before uncertainty about a possible trade deal subsides. Patient investors would, however, do well to consider their investment options in emerging markets as current levels provide a very attractive entry point. Discerning allocations to equities and bonds in developing markets may yet prove to have been a smart move when assessed at the end of the next decade.
I wish you a blessed Christmas and I trust that 2020 will bring you and your loved ones a much better decade (for your investments too). The future is here.
Janet Hugo CFP® – was awarded the Financial Planning Institute’s Financial Planner of the Year award in 2019. This award recognises excellence in all areas of financial planning and wealth management. She can be reached at 0861 888 987.