The asset management industry in Asia has undergone big changes since AsianInvestor started in 2000. Having served as the title's founding editor and, more recently, as editorial director at Haymarket Financial Media, I’ve enjoyed a front-row seat. As my final contribution for AsianInvestor, I have come up with a list of what I consider the top five issues facing the industry.
Here is my fourth question.
Will technology render many asset management activities obsolete?
The robo-adviser is no longer the stuff of science fiction, and the initial results suggest it works. The financial industry has done a good job over the years of making itself more complex, jargon-filled and obscure than it needs to be to serve households. Investment is no exception.
Yet it turns out that an algorithm can come up with a reasonable portfolio of low-cost index funds that resembles the advice of an expensive human being. Anything that returns financial services to simple, clear, low-cost offerings that ordinary people can grasp is to be welcomed.
It is possible to conceive of a world in which advice becomes automated for the mass affluent, but increasingly human for people who pay for it. Some creative ideas will remain exclusively the purview of human beings, reserved exclusively for the rich and well-connected. This is not so different from the reality today, but it does suggest many of the well-groomed salespeople who work at banks, masquerading as investment advisers, must either climb the value chain or lose their jobs.
This outcome may not be immediate, however. Simple calculations offered by the likes of Wealthfront are one thing. Relying up on machine learning to offer more complex suggestions is another. DBS, for example, is using IBM’s Watson (the computer that beat humans at chess), to experiment with more advanced solutions.
The feedback is: promising but not yet ready. Machines are learning quickly, but they are only useful to the extent that humans learn along with them. Even AlphaGo’s recent triumph over human Go players tells us that machines are getting creative. But until financial markets resemble rules-based games rather than irrational casinos, it’s possible that humans may yet enjoy careers in financial services.
The place to watch will be the quant funds. The likes of Renaissance Technologies, Citadel Group and Dimensional Fund Advisors have, despite their very different business models, enjoyed steady outperformance based on mathematical strategies.
But if too much money goes into quant strategies – from, say, insurance companies desperate for yield – can quants still outperform? Put another way: how scalable are quantitative investment strategies? If they prove to be quite scalable, it will be a further blow to traditional (human) active fund managers.