What role can AI play in transforming investment strategies?

By Puja Sharma

Invesco Advisers, Inc., a subsidiary of Invesco Ltd. released the findings of its eighth annual Invesco Global Systematic Investing Study, which is the evolution of the Invesco Global Factor Investing Study, published annually since 2016. The reposition this year reflects the changes within the quantitative investing world, and the use of quantitative investment methods beyond just factors. The study, which is based on the views of 130 institutional and wholesale investors that collectively manage $22.5 trillion in assets, also finds a growing consensus that systematic tools can help investors navigate key challenges, such as volatile markets and imperfect data.

The report found that half of systematic investors surveyed have already integrated artificial intelligence (AI) into their investment process and reveals a widespread expectation that AI tools will transform portfolio management in the years to come. The majority (62%) anticipate that, within a decade, AI will be as important as traditional investment analysis and 13% expect it to become more important.

The AI revolution already underway

Systematic investors are already using AI across a range of core functions. For example, respondents reported harnessing AI to better understand the market environment and identify macroeconomic turning points: (46%) are using AI to identify patterns in market behavior, and (38%) are using it for portfolio allocations and risk management. Investors appreciate AI’s ability to help mitigate human biases and forecast the unexpected.

Investors expect the use of AI to grow significantly in the coming years. While a significant minority (29%) already use it to develop and test investment strategies, the vast majority (76%) anticipate doing this in future. Additionally, while (20%) currently use it to monitor and adjust investments positions in real-time, more than half (55%) expect to do so moving forward.

Wholesale investors identified improved risk management as the main benefit of AI, cited by (76%) of respondents, followed by the flexibility to adapt to changing market conditions (65%). However, challenges remain: wholesale respondents cited the cost of implementation (64%) and the complexity and interpretability of AI models (61%) as the main obstacles to adoption.

“AI driven-portfolio strategies certainly present a new opportunity when used correctly,” said Mo Haghbin, Head of Solutions, Invesco. “Firms need to adapt quickly to leverage this technology as we see increasing interest in AI-driven models moving forward, especially among younger investors.”

Institutional investors instead see accurate and timely insights (78%) as the most compelling benefit of AI, followed by improved risk management (74%) and increased efficiency and automation (68%). Their primary concerns are complexity (78%) and data quality and completeness (51%).

“Managing stakeholders and providing transparency is a key challenge for institutional investors,” continued Haghbin. “Investors need to be prepared to clearly articulate how AI models are being used in portfolios to justify their use and value add.”

APAC and North America lead the way

However, Invesco’s study found significant regional variations in attitudes towards AI and NLP, with investors in EMEA markedly more skeptical than their APAC and North America counterparts.

The majority (51%) of EMEA investors believe that AI will still be less important than traditional analysis methods in ten years’ time, versus just (10%) in North America and (7%) in APAC. Conversely, just (4%) of EMEA investors believe AI will supplant traditional analysis methods in that period, with much higher numbers observed in both North America (19%) and APAC (20%)

Moreover, North America and APAC investors are currently far more likely to be using AI in the investment process. APAC investors are twice as likely as EMEA investors to be using AI to identify patterns in market behavior, and more than three times as likely to be using AI to adjust investment positions in real time. EMEA investors trail North America and APAC investors in each aspect of AI adoption

Bridging the ESG data gap

However, the usefulness of systematic approaches is not limited to the macroeconomic picture; respondents have commended systematic strategies as an antidote to the challenges around environmental, social and governance (ESG), particularly bridging the ‘data gap’.

Invesco’s study found around two-thirds of respondents are using systematic strategies to incorporate ESG into their portfolios, and systematic tools have become useful for helping investors decode ESG variables and metrics, which can have a meaningful impact on performance.

Around half of respondents agree that systematic investing can help to apply ESG when data is scarce, and many noted that they were using systematic tools to reconcile the inconsistencies between ratings agencies and develop company scores from raw data.

Key highlights:

• Artificial intelligence (AI) revolution is already underway: half of systematic investors surveyed have integrated AI into the investment process and the majority (75%) expect AI to match or exceed importance of traditional investment analysis within a decade.
• AI is mostly used to understand market trends and to optimize portfolio allocations; investors see potential in testing investment strategies and monitoring and adjusting trading positions in real-time.
• Around 41% of respondents are using natural language processing for sentiment analytics, with three-quarters expecting to use it in future.
• Most investors believe systematic strategies helped them navigate challenging market conditions in 2022.