By Clare Flynn Levy | 26 Mar 2016
It’s not pretty out there.
Markets are volatile, allocators are pulling money, and the underlying flow of assets from active to passive vehicles continues.
Those asset management leaders who do have space to think longer term are confronted by the threat that artificial intelligence will supplant human fund managers, or that outsiders like Google will enter the market, using their brand and data strength to disrupt fund management in the same way Uber has taxi drivers.
In these choppy seas, everyone’s first instinct is not to rock the investment process boat.
That feels safe, but it’s an emotional response – and exactly the wrong thing to do.
True – there will never be a good time to change your process – the markets are rarely calm enough and, even if you have time over the quieter summer months to reflect on how you do things, it’s likely you won’t have the bandwidth to execute once the market kicks off again in September.
Now, more than ever, is the time to stop and consider how you could be learning from past success and mistakes in a more efficient way, refocusing your team’s energy on doing more of what you’re good at, and less of what you’re not.
Technology is the problem.
Yes, you have more sources of information than ever – more quant reports, more ways of looking at risk, more digital lenses through which to view the market.
But having seen the inside of countless fund management firms in my 10 years as a portfolio manager and 10 years in buy-side financial technology, I can tell you this for certain: the way that the vast majority of fund managers make decisions has not changed in 20 years.
At the end of the day, whether the strategy is hedge or long-only, active management involves a portfolio manager who reviews the information presented by analysts, risk systems and external sources, and then makes what is ultimately a qualitative judgement call.
Has the quality of these judgement calls improved at pace with developments in the rest of the industry? The answer is a clear and resounding No.
Technology is a big part of the problem.
Presumably you’ve noticed the contrast between the smooth, increasingly intelligent technology you use at home and the often clunky, legacy software used at work.
In most cases, the tools used by professional investors to capture, manage and measure their investment processes haven’t changed since the advent of Word, Excel and email.
There may be more inputs, but the “decision machine” itself hasn’t seen an upgrade in several decades.
No surprise, then, to see computer investment models – which constantly iterate on their approach – steadily stealing market share from human fund managers.
It is broke. But you can fix it.
The good news is that humans are still better at making judgement calls than machines.
Whilst artificial intelligence is advancing in leaps and bounds, we know that many of the patterns necessary for machine learning actually fail to present themselves consistently in financial markets.
Human intelligence, and the individuality that it expresses, remains a crucial element in the equation. Indeed, the future of most industries is a combination of man and machine, rather than a question of man versus machine.
In chess, this is kind of dual-strength player is called a “centaur”: one who combines human intuition, creativity and empathy with a computer’s ability to crunch numbers and make predictions based on the past.
But that doesn’t mean that human investment decision-makers can rest on their laurels.
For even though investment management is an industry whose true value proposition is the way decisions are made, very few managers are doing anything to make the decision-making process a provable competitive advantage for themselves.
It’s time to go into “centaur” mode – to make the most of the technology, not to replace your human decision-making, but to support and strengthen it. To leverage the data you’re already collecting to develop ways of working more effectively.
The tools ARE available – you just need to prioritise putting them into place.
“Nice to Have” will be “Must Have” in the near future.
We’ve watched with interest in the last few quarters as senior management at some of the world’s leading investment management firms has transitioned over to a younger generation.
This new cadre of investment leaders is ready to compete in new ways, demonstrating an ease with technology and a willingness to use it to support and strengthen their front office processes.
If you aren’t one of them, the easy thing to do is bury your head in the sand. Or, you may well be taking the view that you’ll have left the industry within 5 years.
But, come on, you didn’t get this far by being short-sighted and uncompetitive!
It’s time to move outside your comfort zone and do the brave thing: look in the mirror, embrace technology, and solve for maximising return on human energy expended.
If you intend to compete going forward, the opportunity is now.
Humans are still highly relevant to investment decision-making, and only the most forward-thinking of them are optimising their processes to play to their strengths and avoid their weaknesses.
Most are distracted, as ever, by markets, and as a result, making the same mistakes over and over again, wasting energy, and hoping that it will somehow, someday get easier.