In a turbulent market environment punctuated by terrorist attacks, anthrax scares and a sense of uncertainty, equity portfolios managed using advanced computerized artificial intelligence did about as well as their human counterparts.
True believers claim artificial intelligence can analyze stocks better than humans and do it quicker and more efficiently. Perhaps, but this market has taken nearly everything down with it, including smart computer portfolios. AI is designed to learn from its mistakes, but it can't predict terrorism any more than human portfolio analysts or political leaders.
Although only a few portfolio managers use AI, those few outperformed or were within shouting distance of their benchmarks for the first nine months of 2001 but then suffered a major downturn after the Sept. 11 attacks along with their human counterparts.
Pure AI manager NeuWorld Financial, San Diego, saw its equity return decline 23.1% through the third quarter after being well ahead of the market until Sept. 11. Advanced Investment Technologies, Fort Lauderdale, Fla, which uses AI in conjunction with human analysis, saw its large-cap portfolio decline by 18.3%. The S&P 500 was off 20.4% during the same period. The AIT all-cap portfolio declined 20.1% vs. the 20.8% drop in the Russell 3000. The Standard & Poor's Neural Fair Value 20 portfolio, based on an artificial intelligence model, was down only 1.3% through the first nine months of the year.
On the other hand, diversified stock mutual funds were down 22.17% during the first three quarters of 2001, according to Lipper Inc.
AI doesn't have any advantages when it comes to events like the terrorist attacks, said Barry Hippensteel, portfolio manager at NeuWorld.
"It isn't a genie in a bottle. What it is, is a system which can analyze securities better than a human analyst," he said. For example, the NeuWorld AI system executes more than 700 million calculations in analyzing 116 variables on 4,000 stocks. A human stock picker doing one calculation per second, without making a mistake, would take more than 20 years to make the same calculations, he said.