AI Helps Generate Alpha
Nearly all asset managers using artificial intelligence-based technology in their pre-investment phase said it helped them to generate alpha.
A survey from Deloitte Center for Financial Services found that 85% of respondents said using AI-based solutions in the pre-investment stage helped them generate returns. For example, using natural language processing and generation saves time on data collection and allows analysts to focus on interpreting the data.
In addition three quarters, 71%, of respondents said they would increase their budget for alpha-generating technologies such as artificial intelligence over the next 12–18 months.
Deloitte Center for Financial Services surveyed 400 senior investment management executives for the 2022 investment management outlook. The study included investment management companies with revenues of at least $500m and was carried out in July and August 2021.
However Deloitte warned that just increasing spending on technology will not guarantee success and firm leadership is the most important factor to kickstart the AI adoption process.
For example, UOB Asset Management followed a sandbox approach while implementing its Multi-Signal Predictive Analytics Project which allowed users to develop analytical prototypes and analyze data stored in its data lake and enterprise data warehouse systems.
“Moreover, UOB’s AI adoption workflow process is designed to identify, scale, and fine-tune the most productive use cases while decommissioning the ones that do not meet business needs,” added the report. “Some firms including Vanguard Group and Nuveen are coaching employees to overcome fear of failure and promote innovation”
In addition to AI, cloud computing and storage are also spending priorities to improve operational efficiency and possibly support flexible working.
“Cybersecurity solutions that help firms securely adopt new working models continues to be one of the top priorities in 2022 as it was last year,” said the report.
Digital transformation can be difficult to achieve for firms so they are also using mergers and acquisitions to achieve their goals. Adding new technology capabilities was the top M&A driver for respondents in the survey, above increasing scale and distribution channel expansion.
M&A deals in investment management increased from 516 in 2016 to 628 in 2020 according the survey. Deal value in the first three quarters of this year is $31.6bn, up from $26.3bn in the same period in 2020.
“Survey findings indicate that global M&A activity is expected to increase broadly with concentration in investment management firms with between $5bn and $10bn in annual revenue over the course of 2022,” added the report. “This finding aligns with expectations for continued consolidation among smaller and midsized investment management firms to gain more capabilities to better serve clients.”
Diversity, equity and inclusion
The survey found that respondents who quantified the impact of diversity, equity and inclusion initiatives in their financial statements were more likely to indicate that employee engagement and productivity have become much stronger (39%) since the start of 2021, than those who did not (19%).
The report said: “Progress toward quantifiable and transparent business metrics can help firms achieve a higher bottom line, financially and socially. In addition to increasing the focus on DEI, many firms are implementing broader environmental, social and governance initiatives.”
For example, The Carlyle Group has linked its chief executive’s compensation to developing an inclusive culture and set aside $2m to recognize employees that have gone above and beyond to meet DEI goals.
“Legal & General Investment Management (LGIM) attributes their ability to achieve gender parity in senior leadership to being flexible, adaptable, and constantly receptive to employees’ views,” said the report. “These culture strengthening actions can impact employee resilience at an important time, when good talent is hard to replace, and openings can strain productivity.”