Artificial intelligence refers to the simulation of human intelligence in machines. The goals of artificial intelligence include learning, reasoning, and perception. AI is being used across different industries including finance and healthcare. Weak AI tends to be simple and single-task oriented, while strong AI carries on tasks that are more complex and human-like.
AI World Equity Fund - Global
Machine learning is an area of artificial intelligence (AI) with a concept that a computer program can learn and adapt to new data without human intervention. A complex algorithm or source code is built into a computer that allows for the machine to identify data and build predictions around the data that it identifies. Machine learning is useful in parsing the immense amount of information that is consistently and readily available in the world to assist in decision making. Machine learning can be applied in a variety of areas, such as in investing, advertising, lending, organizing news, fraud detection, and more.
Patrick Armstong (CIO of Plurimi, the sub-investment manager for the fund) explains
Our AI system likes stocks with growth, quality, valuation and momentum. There is nothing new in that approach to stock selection, it’s just the way our AI systematically and objectively assesses the characteristics that humans have tried to identify in stocks for decades.
As well as being able to analyse thousands of variables for thousands of companies everyday the system has other distinct advanateges.
- Objectivity not emotion
- It spots value traps
- Confidence to stick with dominant companies
1. Oil and Gas and value traps.
It did the same thing for me with European Banks for me in 2019.
We run a benchmarked strategy. Energy is party of that benchmark and all else being equal we will own an energy company. The system made us exit Royal Dutch, and OMV at the end of 2019 and January 2020.
At the time I believed the oil companies represented good value based on their cash flow multiples and dividend yields. The system also scored them highly on valuation but clearly highlighted a value trap potential with very poor quality and momentum scores. It would not let me buy any other major oil company at that time it made me exit OMV.
The system would not let me look at valuation in isolation and pushed me to a stock that had better blend of characteristics.
It rated Neste close to a perfect 10 at the time (current 8.6). With very strong scores on quality and momentum. It picked up the positive analyst views relating to its clean energy status as part of its momentum scores.
Our strategy’s energy performance is up 60% year to date while the benchmark is down 50%.
2. Objectivity – rather than emotion
The system has no emotion or shame in making its decisions.
Airbus: We held Airbus through most of 2019 and the first two months of 2020.
In mid-Feb 2020 I was on Bloomberg television, and Guy Johnson looked at our Factsheet and asked why we own Airbus
I went through the story of its weak competitor Boeing and its 737 issues, and highlighted US/China tensions that may see China pivot to Airbus. Talked about the valuation and growth of Airbus and the positive broker revisions.
The next day I came into the office and our system said we must sell Airbus. It changed its base economic environment from ‘Upcycle’ to ‘Downcycle or Recession’. It also picked up a number of Analyst downgrades in the airline sector (Even though Airbus itself continued to score 9.7/10 ). It knew weak airlines were bad news for the company.
I was completely embarrassed that I had just spoken so glowingly about the company the evening before, and had to sell it that day, but I followed the advice as we do by rule. Human emotion would not have allowed me to make this decision on that day, even if I knew everything the machines knew.
The exit signal came on Feb 14th at $140.92 per share. It subsequently fell to $53.
The system also got me to sell Disney at $139 in the summer of 2019 when it was my favourite company.
3. A more robust way to look at value, and not sell dominant companies too early.
Apple has been a long term holding in the strategy. In the past I used to own the stock based on a discount to the market, and much better than market growth. I had sold Apple in some of our non-AI driven strategies when it moved to 22x earnings and the market was at 18x earnings. The system has unfailingly said to buy Apple since we launched the strategy.