Artificial intelligence and robo-technology are putting the future of the fund manager under threat, according to experts. Front-office staff will not become extinct but their roles will evolve and only the fittest will survive.
Christopher O’Driscoll, head of disruption for financial services at PA Consulting Group, says “the robots are coming” and fund houses are looking for AI solutions that imitate fund manager behaviour.
“The days of fund management as we know it are numbered,” he says.
“The best future careers in fund management will be in building robots to research markets, scan the chatter on social media and automatically optimise their portfolios.
“Fund managers have made a tidy living researching the performance of businesses around the world and investing other people’s money accordingly. But they won’t be advising their children to follow in their footsteps.”
Last month BlackRock fired 40 people in its active equities group, including seven portfolio managers, in an overhaul that will see their funds switched to quantitative investment strategies.
Many asset managers, such as Axa Investment Managers and Union Investments, are also exploring the use of AI to help their teams make better investment decisions.
Alan Miller, founder of SCM Direct, says most fund managers will be replaced by robots, including “standard computer-run index funds”, because of costs, the drive to get an “information edge” and common sense.
“The inherent edge of the computer, robot or low-cost, common-sense human grows year by year,” he says.
Axel Pierron, founder and managing director at research firm Opimas, estimates that headcount at asset managers worldwide could reduce by 90,000 people by 2025, or roughly 20 per cent.
He says fund managers will make up a large part of that reduction.
Mr Pierron says that as the industry consolidates and appetite for passive investing grows it will “eventually” lead to a more difficult environment for the fund manager.
“The real question for me is ‘what will an asset manager look like in 10 years from now?’” he says.
“The [fund manager] role will be more of a monitoring role,” says Mr Pierron.
Some roles will also be replaced by data scientists and he says there will be a need for people “who have a deep understanding of the market” to ensure that AI is being used according to the firm’s strategy.
Andrew Clare, professor at Cass Business School, says AI is “just the implementation of rules” but that evidence suggests robots might be better at investing than humans.
“Smart beta rules have produced far better risk-adjusted returns than the majority of fund managers over long periods of time,” he says.
Mr Pierron says the new environment is one that “even without the implementation of AI, there is a trend for that market to evolve – larger firms, larger market share”.
“It is also to do with the ability of the sell side to service that lower end of the market,” he says.
The danger is that smaller firms of five to six portfolio managers could evolve into a team of three or four, with just one traditional portfolio manager and the rest possessing other competencies.
“AI is going to accelerate that and reinforce it,” he says.
“[If not part of] a major brand, it might make more sense [for a firm] to come from an AI perspective or a start-up perspective.”
Clare Flynn Levy, founder and chief executive officer of Essentia Analytics, which works with fund firms to analyse historical data, says she does not expect AI to wipe out the fund manager completely as the technology is not sophisticated enough.
AI is good at solving “small-world problems” but not yet ready for “large” ones like making investment decisions, she says.
“The top quant managers in the world are working with AI and so far are only using it to automate smaller tasks within their processes,” she says.
For the foreseeable future AI will be used more for analytical tasks, “leaving the human fund manager to do the decision making, which does require judgment calls that computers are not yet able to make well”.
She agrees that the fund manager population should reduce, however.
“It’s survival of the fittest and the fittest will be the fund managers who embrace technology to help them maximise their own return on energy expended,” she says.
The ones who remain will focus their time and energy on doing more of what they are good at and “less of what they’re not”, she says.
Ms Flynn adds that there will be fewer highly paid senior fund managers in the next five years.
There will be proportionally more junior roles, largely because technology can help less-experienced portfolio managers learn “much faster” than the previous generation, she says.
“What we’re seeing is inefficiency within the industry itself being corrected,” she says.
“The survivors will be those who use technology to make them stronger and more adaptive.”
Ms Flynn also believes that there will be “massive arbitrage opportunities” for some active fund managers as a result of inefficiencies arising from money flowing into index funds.
The emphasis some investors continue to put on the human touch should also help.
Mr Clare says: “Investors, and in particular retail investors, like to know that a human is overseeing their investments in the same way that airline passengers like to know that there is at least one pilot on board their plane.”