Leveraging AI for Smarter Investment Returns

By ONG Ai Ling, Head of AIOI (AI of Investing), Lion Global Investors, January 2022

Leveraging AI for Smarter Investment Returns

Leveraging AI for Smarter Investment Returns

The 17th Century was an era of glorious financial innovation. The Dutch East India Company was the first company to conduct an IPO – a joint-stock company offering fractional ownership of its business to the public in 1602. A few decades later, the first-ever bond was issued by the Bank of England in 1694 to fund a war against France. Little did they know that in doing so, they sparked an asset management industry worth over $100 trillion dollars today (Source: BCG, 8 July 2021).

Almost half a millennial later, the train of innovation chugs on. As we boldly step into the 21st Century, we see several engines that will be powering the next stage of innovation in our field. By no means intended to be exhaustive, the following proposes to serve as a potential framework for us to think about what lies ahead for our industry.

Democratising Investing for the Masses

At the core of our industry, we see technological disruption affecting three crucial areas – namely, product packaging, product distribution and product (portfolio) creation & management. The first disruption we have witnessed over the past 28 years – in the form of the Exchange-Traded Fund (ETF) – changed the way our investment products are packaged and sold. The second, more recent disruption is on the product distribution side – that is the revolution led by Robo-advisory platforms. The third area of disruption leverages Machine Learning (ML) and other Artificial Intelligence (AI) technologies to deliver a smarter investment product at a reasonable cost. It also represents a fundamentally new way of portfolio creation and management. 

These three elements combined present a potent cocktail that has the potential to completely revolutionize the way we invest – to democratize investing by leveraging technology to serve the underinvested masses.

1. Product Packaging: The Growth of Investing through ETFs

ETFs have seen net inflows exceeding that of mutual funds since 2007. Global assets under management (AUM) of ETFs now exceed that of mutual funds (Source: Financial Times, 9 August 2021).

Part of this has been due to a particular tax advantage that ETFs enjoy over mutual funds in the US. As a result, most ETFs enjoy an economy of scale that enables them to be the low-cost vehicle of choice.  Whilst passive ETFs are still the predominant form since 2008 the US SEC has greenlighted the creation.

Source: Investment Company Institute (ICI), 2021 Factbook

LionGlobal China Leaders ETF

The LionGlobal China Leaders Exchange Traded Fund (ETF) is a China-focused ETF that tracks the Hang Seng Stock Connect China 80 Index. This index includes the 80 largest Chinese companies in terms of market capitalisation listed in Hong Kong and/or mainland China. Each company’s weighting in the index is capped at 8% and each industry’s weighting in the index is capped at 40%, which maintains the diversification of the index. For investors who want to participate in China’s growth story, or want to increase their exposure to Chinese equities, an ETF focused solely on Chinese companies is a way to gain diversified exposure.

2. Product Distribution: Lowering the Cost of Bespoke Advice

The more recent innovation is the development of the Robo-Advisory landscape. Generally speaking, a Robo-Advisor is an online financial advisory or investment management solution based on an automated process.

It operates without human intervention, by utilizing mathematical algorithms to provide financial and investment advice.

By replacing costly human financial advisors with algorithm-driven “Robo” financial advisors, the industry aims to lower the costs for investors, while also allowing them to invest with minimum investment size (from as little as $1!). Deloitte estimates the current AUM of the Robo-Advisory industry to be roughly $2.2 – 3.7 trillion as of 2020. They expect this AUM to rise to $16.0 trillion by 2025, which would make the AUM roughly three times the size of the world’s current largest asset manager. (Source: Deloitte, August 2016)

LionGlobal Money Market Fund, Enhanced Liquidity Fund and Short Duration Bond Fund

In 2018, The Robo-advisory landscape in Singapore has seen phenomenal growth over the past few years. These digital leaders have led the evolution of Cash Management solutions in the space by leveraging on digital-first approach to market financial products. At the same time in 2018, Lion Global Investors started building up our Cash Management suite comprising a trio of funds designed to optimise liquidity for investors in a low rate environment – namely our Money Market Fund (~1%* yield), Enhanced Liquidity Fund (~1.6%* yield) and Short Duration Bond Fund (~2%* yield). We have partnered hand-in-hand with these players in enhancing liquidity with the LGI Cash Management suite.

3. Portfolio Creation and Management: The Machine Learning and AI Revolution

The third, ongoing revolution is in the way we create and manage our investment portfolios. As a leading fund management house, Lion Global Investors believes that applying Artificial Intelligence (in particular Machine Learning) to Investment Management is the next frontier of investing.

It is indeed a technology that we are looking at deploying in various ways where it can boost investment performance, especially in an environment of low-interest rates and the growing popularity of low-cost investing. Furthermore, deploying such technology allows fund managers to cope with the large and growing volumes of data to cover more ground than using traditional research methods.

Source: Deloitte, August 2016

LionGlobal Disruptive Innovation Fund

The LionGlobal Disruptive Innovation Fund is the first easily-accessible fund in Singapore that invests in disruptors globally. The Fund invests in 100 stocks shortlisted from an investible universe comprising of disruptive companies, i.e. disruptors, and is balanced quarterly. The stocks in the portfolio are selected by a 5-factor screening process, namely market capitalization, price volatility, sales growth, price-to-sales ratio and earnings-growth forecast. The Fund’s diversification approach lowers the overall risk of the portfolio while capturing the growth potential of the disruptive innovation megatrend.

The Path Forward

While most in our industry recognize the urgency to embrace technology, there is a huge gap between vision and reality. In a survey by Accenture on The Future of Asset Management, although 95% of asset managers in North America believe that their technology, data and digital capabilities will be the key competitive differentiators by 2025, most are only in the early stages of adopting disruptive technologies such as artificial intelligence (AI), Machine Learning, cloud and alternative data.

Less than a third (28%) are experimenting with the technology, and just 17% are in the more advanced stage of scaling AI across their organizations. Yet, the same paper notes that firms who have deployed AI across their investment process uncovered some 300 bps of alpha.

The AI / ML revolution is happening now, in the global arena, on a global scale in our industry. We at Lion Global Investors are harvesting technology to build a better and more efficient asset management business. The 21st century will be a glorious era for financial innovation.

For more details on Lion Global Investors, visit: www.lionglobalinvestors.com


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