The rise of artificial intelligence is redefining the way institutional investors and money managers must approach portfolio diversification, according to Liz Young, director of market strategy at BNY Mellon Investment Management, who spoke Tuesday at the firm's North America client conference in New York.
As evidenced by big-name stocks like Tesla Inc. and Amazon.com Inc., the sectors that publicly traded companies are in are blurring, Ms. Young said.
"Take a company like Tesla, for example. Where does that belong?" she said. "Is that an auto company or is that a technology company? That is going to continue as AI takes over and as big data takes over," she said, citing Amazon as another example of this trend.
"It used to be that we could say, if I fill in all the sector boxes (and the) style boxes, I'm diversified. And that is no longer the case," she said.
Instead, investors will need to determine what is driving each company's growth, and diversify those drivers, "which is a lot trickier to do," Ms. Young said.
The blurring of sectoral boundaries is one of four investment-specific challenges that the rise of AI is expected to present in the industry, a research report published Monday by BNY Mellon Investment Management and CREATE-Research found.
Other AI-related challenges are shorter corporate life cycles as AI creates winners and losers, a shift from emerging economies to onshore manufacturing and more difficult asset valuations.
"AI will be enhancing the intangible value of companies in ways that are hard to measure, as shown by Apple, whose intangible value has fluctuated far beyond its financial strength lately," said the report, "Future 2024: Future proofing your asset allocation in the age of mega trends."
The report said that both AI and climate change were "supertanker" trends reshaping the future of investing.
As more money managers implement AI to enhance their investment decision-making, the move could serve as a boon to active managers, despite challenges, Curt Custard, CIO at Newton Investment Management, an affiliate of BNY Mellon, said at the client conference.
"The amount of information (available) has reached a tipping point. There's so much data out there that AI allows us to identify patterns in behavior and things that aren't evident to everyone," Mr. Custard said.
"That's what this explosion of data means," he said. "It's actually sort of exciting, and I'm going to go out on a limb and say there could be a resurgence in active management as people start to incorporate this data in their investment process."