I’m relieved AI has come at the end of my investing career

As with many conversations I have with investors these days, this one quickly turned to artificial intelligence. The recently retired fund manager I was talking to put it well: ‘a car won’t go by itself; it needs to be driven or at least to be told where to go. But if you want to get to Manchester, it’s a lot easier by car than on foot.’

And that is the nub of the AI question for high-value-added intellectual activities like investment. It’s not really about whether the AI can do it better than the human, but how the AI can help the human to do it faster, more accurately or at a lower cost.

A lawyer at the same lunch added that, when he started out, a key part of the trainee’s job was ‘discovery’ - poring over reams of documents to find the information for their boss to interpret. Same thing in investment - where, quaintly it now seems, a company I used to work for had the catchline ‘the information advantage’. By that, it meant a big team of numerate but relatively unskilled youngsters trawling through annual reports to populate a database with financial ratios that in turn enabled investors to do the real work of picking stocks.

One of the most interesting potential uses of AI is in the expensive, resource-heavy business of investment analysis. Can the machines really do it better? The answer is both yes and no.

The reality of that ‘information advantage’ was that it was the difference between a little bit of pretty basic knowledge and none at all. The effort that went into generating that marginal edge was significant, expensive and time-consuming. It is work that AI promises to do in a fraction of the time for a fraction of the cost. Like the hundreds of thousands of people who used to work with horses in nineteenth century London or New York, those data grunts will have to find a new way to earn a living.

So, AI is potentially a labour-saving device - a multi-purpose vacuum cleaner or dishwasher. Another way in which it could improve our lives as investors is by eliminating many of the unhelpful behavioural biases that cloud our ability to make good decisions. People are generally more interested in stories than data. AI doesn’t care.

A recent study of AI and stock picking from Chicago University’s business school tested whether the revolution could move yet further up the food chain than the data gathering that provided my former employer’s information advantage. It looked to see if artificial intelligence could take on the analysts looking to turn basic financial data into predictions about the future direction of corporate earnings. This is a key part of the investment process for active fund managers, providing the raw material for their stock selections. The study found that machines did it slightly better.

More interestingly, it found that portfolios constructed using those earnings predictions performed better in a statistically significant way too. It’s early days yet, but the jobs at risk in a whole range of professional settings are getting progressively more senior, and worryingly quickly.

One danger of AI is that it makes the complex business of managing our money seem easier than it probably is. Ask a simple question of an AI tool and it will, as if by magic, come back with an answer that appears to be your silver bullet. You want ten income stocks with a dividend yield above that on a cash fund? Here you go. A portfolio of growth stocks trading at less than 10 times expected earnings? Try these.

Actually, this is not new. Thirty years ago, the first screening software emerged that allowed investors to plug in a set of criteria and spit out a shortlist of potential investments. The problem for most of us was the cost of these services. AI democratises the process. But it also turns it into a black box. I trusted the numbers that underpinned my Online REFS stock screening software because I could see my young colleagues putting them into the system. When I ask Chat GPT a question, I have absolutely no idea where it has gone to find the answer.

AI plays on our predilection for shortcuts. We want that list of ten stocks to be the answer, so it is tempting not to ask too many questions. But as they used to say in the earlier days of computing: garbage in, garbage out.

I am excited by what AI promises for investors, but I am also relieved it arrived at the end of my career and not the beginning. Many of the things I have been paid to do over the past 35 years or so are of little value today. To continue the horsey analogy, I’ve adjusted a lot of bridles and cleared out plenty of stables. Now I need to understand internal combustion, or move aside.

I am confident, however, that there will always be things that people do better. We are social animals. I want the investors managing my money to be AI-enabled but human. I want my financial adviser to ask after my kids. I don’t just want the car, I want someone to show me how to drive it.

The AI revolution is at least as disruptive as the internet boom that preceded it. It will be divisive. It is great news for a small number of people who are already highly skilled and highly paid. It will be painful for a much greater number whose contribution is no longer so highly valued. Winner takes all is not a recipe for social cohesion. But it’s not going away.

This article was originally published in The Telegraph.

4 fund ideas that offer AI exposure

1. Rathbone Global Opportunities

This fund sits on our Select 50 - a list of handpicked funds. It aims to outperform by investing in innovative companies that are growing fast and shaking up their industries.

The fund’s top holding is Nvidia, the chipmaker that sits at the heart of the artificial intelligence revolution. At our latest Wealth Management Investor Forum, James Thomson, portfolio manager of the fund said, “I’m one for exaggeration at times but I feel very confident in saying Nvidia is a representation of what is the beginning of a new computing generation.”

The remainder of the fund’s top 10 holdings include Microsoft, Costco and ASML. The fund’s ongoing charge is 0.51%

• Read more about Rathbone Global Opportunities

2. Scottish Mortgage Investment Trust

This is the third best-selling investment trust on the Fidelity Personal Investing platform in May. The fund offers exposure to a variety of regions, including the US, Netherlands, Brazil, China, and Italy.

Some familiar names come up in its top 10 holdings, including pharma firm, Moderna, Amazon, Ferrari, Spotify, and Tesla. The fund’s ongoing charge with performance is 0.35%.

• Check out the best-selling investment trusts in May

3. Legal & General Global Technology Index Trust

This is a passively managed fund. In May, it was the fourth best-selling ISA fund on the Fidelity personal investing platform and the fifth best-selling SIPP fund.

Most of the fund’s top 10 holdings include US-based companies, though its overall portfolio offers exposure to Asia - developed, Japan and the Eurozone.

Its top 10 holdings include Facebook-owner Meta, Google-owner Alphabet and Taiwan Semiconductor Manufacturing. The fund’s ongoing charge is 0.32%.

4. Fidelity Global Technology Fund

This fund includes a variety of medium and large core and growth companies. Back in May, it was the fifth best-selling ISA fund and the fourth best-selling SIPP fund on the Personal Investing platform.

Its top holding includes Taiwan Semiconductor Manufacturing, Apple and Alibaba.

Read more about the best-selling funds in May

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.