Blending tech into investment

1234

Artificial intelligence is a trendy phrase that can mean many things.

Jim McCaughan, chief executive officer of Principal Global Investors, defines AI as “using algorithmic techniques to analyse data and learn what the patterns imply in terms of market movements”.

In this definition, AI is nothing new. The firm set up a data analysis group 15 years ago. Traditionally, quantitative-based investing has used accounting data to focus on large-cap equities in developed markets.

For equities, the firm created a ranking of stocks from data analysis intended to predict relative attractiveness for a year. “Then we look for things like value traps and that’s where the subjective side comes in. The intention is to have people and machines work together.”

However, what’s changed is that the strategy is moving into fixed income.

“What’s changing is data is becoming cleaner and more available in other markets,” McCaughan said. “Using behaviour or data techniques in the fixed income market is new over the last two years.

“Credit analysis for bonds involves all kinds of work – cash flow of borrowers, asset coverage, etc. That has been done by people with spreadsheets, I would anticipate in five years that will be done by interrogating computer databases.”

McCaughan said the asset management industry’s adoption of AI in the investment process is the result of both fee pressure and the sheer availability of data and computing power.

“Technology will eliminate some jobs for sure. I made the comment we are looking for different recruits nowadays. Ten years ago, we were looking for someone who can analyse a company’s data statement.

“Now we are looking for a PhD in data skills who speaks Mandarin. We all have to re-skill and move with the times. It’s a competitive business.”

1234