UK Leveraging Artificial Intelligence in Portfolio Management

There is no doubt that Artificial Intelligence (AI) is impacting all areas of the financial services industry, but the impact on portfolio management is becoming more striking. In this article, we will look at AI tools and trends that experienced investors can leverage to maximise their returns. Interestingly, many experts believe that we are only now scratching the surface of AI in portfolio management.

 

AI tools for portfolio management

 

There is a common misconception that AI tools in the investment world are changing markets, the way we think, and the way we operate. While they certainly make a difference in investment management and returns, perhaps the most significant benefit is the speed and accuracy with which they operate. They are doing what investors have been doing for hundreds of years, just quicker and with greater accuracy.

 

Machine learning algorithms

 

Predictive analytics in stock selection is a specific area of growth for AI tools in portfolio management. Using historical data, the systems can predict with unerring accuracy how stocks and overall markets will move in the short term. The more data they gather going forward, the more accurate the predictions and the more beneficial to investors.

 

AI-driven trading systems

 

Today, systems can literally trade hundreds of thousands of times in the blink of an eye, impacting markets and prices before "traditional" investors can press that button. Algorithmic trading, perhaps best demonstrated by high-frequency trading, is something that the regulators are watching very closely. In the wrong hands, using the wrong algorithms, they could cause havoc in the markets - as we have already seen in the past.

 

Portfolio optimisation tools

 

AI technology is becoming more accepted in relation to portfolio optimisation tools, which can adjust asset allocation and enhance risk management in real time. The idea is simple: AI-managed portfolios are unlikely to outperform their benchmark index, but on the flip side, they are unlikely to underperform on the downside. While these may not result in dramatic market trades, the ability to automate asset allocation is beneficial for professionals, institutions and private investors.

 

Emerging trends in AI for investment management

 

As we touched on above, many experts believe we are only scratching the surface of AI in the investment world. A number of emerging trends are attracting the attention of investors across the experience spectrum.

 

Explainable AI

 

Often referred to as XAI, it is perhaps best described as a "soft touch" form of AI, where humans can still retain a degree of intellectual oversight and, therefore, greater trust in the results and output from machine learning algorithms. For many people, the first step towards explainable AI will likely give them confidence to utilise the broader spectrum of AI tools available for portfolio management.

 

When you consider that investors are placing their assets in the hands of artificial intelligence, greater transparency leads to greater trust and acceptance. AI could also lead to potentially significant cost savings for portfolio managers going forward, able to utilise their cutting-edge AI technology as clients become more accepting.

 

AI in sustainable investing

 

Was the recent surge in ESG investment a false start or simply the start of a long journey? It is safe to say that interest has waned a little over the last couple of years, although we have not been short of controversy and volatility in recent times. Responsible investing, typified by AI in sustainability investment, is gathering significant momentum amongst the younger generation. Those who suggested that ESG was a here today, gone tomorrow trend may need to think again.

 

Conclusion

 

Undoubtedly, AI technology is already impacting the financial services industry and investment markets. Behind the scenes, this technology is creating significant cost savings and an enhanced competitive edge for those brave enough to make the initial jump. As financial advisers see a significant reduction in costs, improved services, and greater coverage, competitors WILL follow suit. AI in portfolio management and AI in investment are here to stay, and it looks as if we are just scratching the surface.

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