Asset managers' main AI benefit will not be investment performance, says Moody's

Asset management firms are unlikely to be replacing their portfolio managers with artificial intelligence any time soon, according to research from Moody’s Ratings.

While the technology is certainly shaking up the market with investors’ fixation on mega-cap equities that offer exposure to AI’s potential, its abilities in portfolio management are some way off the expertise of human PMs, and even then outperforming the investment markets is unlikely.

As the report points out, in asset management “those that gain an edge one year will typically lose out another and past technological advances have been unable to change this dynamic.” There are only a minority of firms that manage consistent outperformance.

“Just as a typical portfolio manager today, AI-enhanced asset management will eventually achieve - once costs are subtracted - an average return of slight index underperformance,” the report states.

However, while a widespread generation of alpha, or a reversal of interest in passive assets, looks beyond AI’s capabilities, there are benefits for asset managers that focus on efficiency such as streamlining tasks like distribution and administration, enabling asset managers to serve more customers, manage more assets, and reduce costs.

Financial analysis is another area that Moody’s sees as a potential benefit for asset managers, with AI-powered solutions providing better understanding of financial statements, data, and SEC filings to provide retail investors with access to the kind of intel previously only available to institutional investors.

The challenge is for asset managers to drive enough efficiency savings to offset the high cost of implementation of AI. There are also challenges due to regulations, legacy systems, and complex processes, with risks including unintentional bias, incorrect predictions, and potential financial losses.