Digital disruption and artificial intelligence (AI)

Q: AI and digital disruption have captured the imagination of the world in 2023. How do you see this impact playing out over the coming years?

RAFFAELE SAVI: It’s maybe been said one too many times, but here I go again. I think we truly are in a moment of acceleration of this adoption of artificial intelligence in companies and society. I think many things are about the change. The way we work with each other, the way we optimize our businesses, and also what we consider to be intelligence.

I’m a tech optimist, and I think this will unleash massive productivity gains across the board. It will improve our experience at work and at home, and it will also lead to a resurgence in the value of creativity and judgment, which are two of the most human trait of all.

Q: How will AI impact investing? What are the opportunities, and how do you see this impacting portfolio construction?

RAFFAELE SAVI: As a systematic investor, we’ve been looking at machine learning, artificial intelligence for the best part of the last decade, and I have to say that the progress in the last few years have been tremendous.

We moved from a world in which our models were relatively small and shallow to models where they are now large and extremely sophisticated in capturing the many ways in which companies, economies and markets interact.

Artificial intelligence is really being transformational in the way in which we can combine all the relevant information about, again, economies, companies and markets, and bringing to bear in a portfolio that can be customized and tailored for a particular application.

One thing that I think sometimes is easy to miss is that artificial intelligence can lead to a better investment experience, not just higher returns, but a more consistent experience in terms of risk management. An example I like to make is airlines and commercial flying. You might know that 95% of the times that we’re flying on an airplane, is on autopilot, and that has not created faster planes. Planes are pretty much the same speed they were 30 years ago, but the number of accidents have come down significantly. So, safety and risk management are also to the –

Q: How do you see AI impacting the opportunities for portfolio construction?

RAFFAELE SAVI: As systematic investors, we’ve been working with machine learning and artificial intelligence for more than a decade, and I really think that the impact has been transformational mostly on the ability to build portfolios that incorporate a vast amount of information and are also customized to particular use cases.

The progress over the last decade I think has been from sort of portfolios that were based out of models that were relatively small and relatively shallow. The advantage was breadth over depth, to a world in which we’re building sort of very large model that have a lot of relevant feature for sort of detecting opportunities in the interaction between companies, markets and economies, and then they bring them together in a way that is customized to a particular client objective.

Q: How should investors think about risk management with respect to AI?

RAFFAELE SAVI: This is one of my favorite topic, and I think it’s a little bit underappreciated. Many – many people, many commentators, when they talk about AI, the next thing they say is an arms race and, you know, it’s about this technology as speed and power.

One example I like to make, I find it’s inspirational is if you’re thinking airplanes or cars, they’re not any faster than they were 30 years, but they are a lot safer. And so, those are two examples in which technological innovation has led to safety instead of sort of speed, and I think that that might be what happens also in investment.

So, I think risk management is going to be a massive beneficiary of the improvement in AI technology, and that’s going to lead to the ability of sort of hitting return targets more consistently in a way that is customized to each client’s needs.

Q: How can investors express views on AI in their portfolios?

RAFFAELE SAVI: A framework I find useful is to split this questions in two part. One is direct. Where is the direct immediate opportunity in investing in AI? And then, what are the ripple effects across all securities and markets.

So, starting with the direct one, I think that a combination of public and private opportunities might be the way to capture the technology impact of AI. These are producers of semi-conductors for training models, these are modeling abilities, and these are also sort of all the applications that are immediately in the ecosystem.

Some of these technologies are ready and producing a lot of revenues today, and but what’s in the hopper is sometimes even more exciting, and that’s why I think a combination of public and private is essential here.

When I’m looking at the impact of AI broadly in society and across companies in markets, that’s where I think domain expertise and subject matter expertise of business models will be key to understand winners and losers. This is really big. I think it’s a little bit like a moment where the internet came or where cloud computing came. Every company is going to be impacted by this, and again, the subject matter expertise is – will be at a premium.

Q: How can investors express views on AI in their portfolios?

RAFFAELE SAVI: A framework I find useful is to split these questions in two part. Direct impact of AI, that’s a technology story, and indirect impact on every company and market. On the direct front, what we’re seeing now is a mix of technologies and products that are ready and generating a lot of revenues today, and also a very exciting development pipeline.

That makes me think that a combination of public and private markets exposure might be the best one to capture the direct impact of sort of this AI revolution. I also think that there is tremendous opportunity across every market and securities because the impact of this technology will be such to create significant winners and losers, and that’s where I think understanding both the specific opportunity with AI and the different business models that companies and other securities have is going to be essential to understand –

Q: How can investors think about the broader opportunity across domains and across businesses?

RAFFAELE SAVI: Direct, indirect. Direct, let’s assume I did it. Now, there’s a very interesting broad opportunity to generate alpha with this topic across all markets and securities. It’s a – it’s such a significant technological innovation that pretty much every company will be impacted either positively or negatively by it.

And the way we think about it is that to get it right, you need a combination of deep understanding of AI as a technology, and also deep subject matter expertise for what business models are. Every company will have the ability to increase productivity or to lose market share, and this will create a lot of opportunities and –

Q: Part of this for investors is finding the right partners who understand this.

Now, I’m also very excited about the opportunity to generate active returns across all markets and securities through the understanding of the impact of AI on different companies. What I think is going to be key is to marry the tech –

Q: In summary, this opportunity is going to create alpha generation possibility across domains, market sectors and across the economy. Working with an experienced partner who is able to bring the expertise and understanding of AI is going to be critical.

RAFFAELE SAVI: Now, every time that there is a technological innovation of this magnitude, there is huge opportunities to generate active returns and alpha across all securities because every company is going to be impacted either very positively or very negatively by the spread of this innovation.

RAFFAELE SAVI: Now, every time that there is a technological innovation of this magnitude, the opportunities to generate alpha are massive. Every company’s going to be impacted no matter the sector, no matter the country, and we are really focused on capturing this as an opportunity on behalf of our clients.

The way I think about it is you need deep technological understanding of AI, and at the same time, you need deep subject matter expertise in the business models that might be traditional –

RAFFAELE SAVI: Now, every time there is a technological innovation of this magnitude, the opportunities to generate active returns across markets and securities are – is massive. Every company is going to be impacted by it, and it’s either going to be really good in terms of productivity gains or really bad in terms of market share loss.

What is needed to figure this out is a combination of a deep understanding of AI as a technology alongside a strong subject matter expertise in the business models of different companies and sectors. Combining the two is the way to navigate this profound change in the marketplace.