A few days ago we had breakfast with an article whose headline read “ChatGPT creates a more profitable portfolio than the main funds.” In fact, an experiment conducted in the UK consisted of asking ChatGPT to set up an investment fund by selecting 38 companies. After eight weeks, the fund returned 4.9%, compared to an average loss of -0.8% for Interactive Investor’s top 10 funds. These funds include some well-known funds such as Fundsmith, as well as other funds from the world’s leading managers.
We also have every year the study by Pablo Fernández, a well-known finance professor at IESE Business School, in which, by randomly selecting different companies, he usually achieves returns that are above the average of the funds in the market.
Given this type of study and the advancement of artificial intelligence, it is possible to take into account the role of the fund manager and the role of the portfolio manager. This is all the more true as almost 30% of UK adults already do their advice with artificial intelligence tools or are considering doing so: specifically with ChatGPT.
In the industry, we are seeing how effectively we are increasingly using quantitative funds, artificial intelligence-built portfolios, robo-advisors, index funds or ETF portfolios, and all sorts of tools that are much more powerful than any manager’s mind. How can we compete with models that have much more capacity than that of a portfolio manager? This is even more true when the commissions on these vehicles are typically lower. Who is willing to pay for wealth management? Many might think that artificial intelligence means the end of many professions – as has already been shown – including that of investment manager.
In reality, this should not be taken as a chronicle of the announced death of portfolio and fund management, but rather as an incentive to return to the essence of management. And while the quantitative data is very important, it’s not everything. In addition, it is far from the most important. In fact, an S&P study collecting US equity funds shows that very few have the consistency to remain in the top quartiles for five consecutive periods. For large cap funds in particular, the percentage of funds remaining in the first quartile after 5 years is zero!
This is where the magic of humans comes in and the importance of qualitative analysis, which artificial intelligence cannot provide, let alone a quantitative model, no matter how sophisticated the tools may be. Economics is a social science and finance, as part of economics, is also a social science. Therefore, the object of investigation is man. In the natural sciences, Popper’s scientific method works quite well. Not in the sciences of human action. Therefore, we must use the person as a starting point for decision-making.
One of the youngest sectors of the economy is behavioral finance, which will increasingly play a more important role in managerial decision-making. And if we don’t put the focus on people and their actions, artificial intelligence will effectively end the role of managers. However, if we focus on the person in addition to analyzing the quantitative data, the manager gives a much more important value than that of the intelligent models.
Evolve or die. Those managers who know how to recognize human needs, how to integrate qualitative tools into their studies and know that people are at the center of their studies will have skills that no machine can ever take away from them. These managers will add significant value to their companies and be irreplaceable for their clients. If you don’t know how to adapt to change and return to the essence of our science, you’d better find another job. In times of so many advances in technology, we’re going to find out who’s naked at low tide. Active management will by no means die, it will bring greater added value each time; Yes, for those who know how to adapt.