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GUEST EXPERT. Will artificial intelligence (AI) change the way you invest your money? If we rely on the euphoria that the unveiling of the ChatGPT tool has generated since the beginning of the year, we must expect that many sectors, including the investment sector, will be disrupted great speed.
Allow us to make a big statement: AI will not replace the natural intelligence required to invest successfully in the long term.
The excitement surrounding AI seems to have emerged this year, but in reality, it is not a new phenomenon. Almost eight years ago, the author of these lines wrote in the newspaper Deals about a tool that promised to predict movements in stocks, commodities and currencies. At the time, new companies launched an algorithm that made it possible to analyze millions of variables in a few seconds to create a predictive model of investments.
For example, a young company claimed to have developed an algorithm that combs through analyst comments, investor opinions on social networks, historical oil movements, etc. Its founder, Ozel Christo, stated that the technology could eventually achieve an efficiency rate of 75% to 95%, depending on the time horizon sought by the investor.
What happened to Ozel Christo’s company eight years later? Simple research shows that the person who wanted to revolutionize investment thanks to a model boosted by AI left it to found another in a field very far from the world of investment, that of well-being.
Poor returns from funds that ride the wave
Manufacturers of investment products demonstrate formidable efficiency when it comes to identifying trends and themes that appeal to investors in order to offer them attractive turnkey solutions. Multiple exchange-traded funds (ETFs) that rely on AI to select the best investment opportunities have been launched in recent years.
Although the history of AI-related ETFs is relatively limited, looking back at the past performance of some of these funds is essential for those considering riding this wave.
The returns posted by many of these funds over a five-year period are far from flamboyant.
Launched in 2016, the Global X Robotics and Artificial Intelligence ETF (BOTZ, US$25.65) invests in companies that stand to benefit from the increased adoption and use of AI and robotics. These include companies active in industrial robotics, automation, non-industrial robots and autonomous vehicles.
For the five-year period ending at the end of June 2023, this fund produced an annual return of 6.2%. If you had invested equally in an ETF tracking the performance of the S&P/TSX index of the Toronto Stock Exchange and in an ETF tracking the S&P 500 index, you would have obtained a return twice as high for the same period, i.e. 12.9%.
ETFs run by high-profile manager Cathie Wood, which invest in companies benefiting from advances in AI and other technologies that could disrupt their industries, have performed well below the benchmark over five years. The year 2022 was particularly difficult for the firm’s main fund, the Ark Innovation ETF (ARKK, US$40.47), whose value fell by 67%.
ETFs that use AI to select the best investment opportunities have also been launched in recent years. This is particularly the case for the AI Powered Equity ETF (AIEQ, US$30.50). This fund uses the Watson system, developed by IBM and is, according to the company’s marketing materials, equivalent to a team of 1,000 analysts and traders working around the clock.
However, this ETF performed significantly below that of the market during the five-year period ending at the end of June. It generated an average return of 5.1% per year, behind the tandem composed of ETFs representing the Canadian Stock Exchange and the American Stock Exchange as we mentioned previously.
How did this ETF perform during the difficult year that the stock market experienced in 2022? It fell by almost 43%, a performance significantly worse than the 9.1% drop shown by the previously mentioned scale.
Far be it from us to say that AI will not help revolutionize certain sectors. Companies can be expected to successfully leverage AI to create new solutions and products to achieve sustainable revenues and profits. However, it remains impossible to predict who will be the big winners, as Google was in the field of Web search.
As is always the case when there is strong enthusiasm for a sector, an innovation or a trend, we must be extra cautious with regard to titles that are too popular.
What is in vogue and what all investors are talking about frantically rarely turn out to be sources of long-term enrichment. It is better to avoid following the horde who fall into the trap of buying securities at irrational valuations even if many people – including sellers of investment solutions to take advantage of them – nourish the hope that the announced revolution in AI will make you make astronomical gains.
Yannick Clérouin is a portfolio manager and partner at Medici.
