All retirement plans — regardless of size — can apply artificial intelligence to their portfolios in some way, but robust governance and operational capabilities must be in place.
Speaking Wednesday at the Pensions & Investments WorldPensionSummit on a panel addressing how the integration of data will revolutionize investing, panelists said the size of a retirement plan does not matter when it comes to making use of data and technology.
"It's not about small schemes or big schemes — it depends on what you're trying to achieve with AI," said Charles Wu, deputy CIO and general manager, defined contribution investments at the A$44 billion ($31.1 billion) State Super, Sydney. "Probably where it's going to save (smaller plans) a fair bit of cost will be on the administration side and operational side. The hurdle to apply this on investment, it is a little bit higher."
Terhi Halme, senior sustainability specialist at APG, said the manager, along with other participating managers and asset owners, enlisted the help of an external technology firm as it worked on its sustainable development investments asset owner platform. The platform helps institutional firms invest alongside the United Nation's sustainable development goals using data and standardization. "So you can also look elsewhere for the resources, and it doesn't necessarily require that you build in all of the capabilities and the data internally," Ms. Halme said.
Over the long run, the hope is that small plans "will get even more benefit, because they don't have the resources, they don't have the analysts and internal head count," said Ashby Monk, executive director and research director at Stanford University's Global Projects Center and co-founder and chairman of Long Game.
However, plans must ensure they have robust governance structures in place to embed AI and use alternative data in their portfolios, panelists said.
Plan executives must also think about where they want to embed a new data-driven capability.
The process will be similar to that about a decade ago, when plan executives began considering the insourcing of investment management, Mr. Monk said.
"We need to really think about what are the safe spaces to onboard AI. Recognize that our industry is not very good at failing, and yet there is no innovation without failure. … That's hard in our world where we have prudent person rules and fiduciary duties. We're not designed for that," Mr. Monk said.
Plans should find safe areas to experiment with AI, he said. "The first place to apply AI is not to try to generate alpha. It would be, let's think about our operational footprint, see if we can unleash AI to take a bunch of unstructured data and make it structured … to do better passive investing." Once there is comfort around the role AI can take in an investment process, then look into how it can be integrated "in attempts to beat the market," Mr. Monk said.
Panelists added that the use of AI will bring about a number of advantages for plan executives, including the ability to better hold investment managers to account and to help inform decisions.
But panelists were split as to whether investment managers should be worried about machines taking their jobs.
"For this moment, we use alternative data as an input into our decision-making process and not yet to replace" human judgment, APG's Ms. Halme said.
State Super's Mr. Wu agreed. "I think we're far from it," with human judgment needed throughout the investment process.
"I'm actually really positive with the development, because it actually unlocks the time of doing some mundane work" and you can do something of higher cognitive value, he said. "It allows you time to think."
Mr. Monk, however, said investment executives should polish their resumes.
"It's not just AI — tech is going to transform our industry. We really haven't been beaten by software the way other industries have. … We kind of hide our (intellectual property) in boxes unlike other open-source industries, so we haven't had that tech revolution yet to really transform our operations. And it's coming."
That trend has been exacerbated by the coronavirus pandemic, he said.
"There's gonna be a lot of freedom time, which is code for certain people may not be required," Mr. Monk said.
Gaining the enhanced "inferential insights" that come with using AI "will really play out to empower long-term investors," he added.
But human beings "will always have a comparative advantage in human relationships — so as long as this is a business where we need to have conversations, exchange ideas, discover things, we will always need to be in the loop, even if the robots 50 years from now are far better than us at capital allocation and risk management," Mr. Monk said.
