As market averages head south, the stock-picking abilities of active equity portfolio managers, analysts and market strategists are being called into question. With all the brainpower and market savvy of Wall Street unable to do much in the wake of sour corporate earnings, rumors of war and a staggering economy, perhaps it's time to look at artificial intelligence.
Proponents of using AI for modeling equity portfolios claim computers can recognize patterns and relationships among hundreds of interacting financial variables. The human mind, they claim, can understand the relationships among only three or four variables, at best. Therefore, the thinking goes, computers can analyze market and individual securities data millions of times faster and more accurately than humans can, making investment decisions without human intervention or emotion.
NeuWorld Financial, San Diego, uses only AI in running its Eagle 12 active domestic equity model portfolio, which has had only two up months this year, March and August. For the year ended Aug. 31, Eagle 12 is down 21.5% while the benchmark Standard & Poor's 500 returned -20.24%.
The S&P Neural Fair Value 20 active domestic large-cap equity model portfolio fared better, returning -8.56% for the same period.
So, while smart computers didn't blow Wall Street out of the water, they didn't do much worse, and they did it without losing any sleep or taking any management fees.