Achieving better investment outcomes with AI

CONTRIBUTORS

Max Gokhman, CFA

Head of MosaiQ Investment Strategy,
Franklin Templeton Investment Solutions

Ralph Corasaniti, CIMA®

Strategic Accounts & Innovation Director, Retirement & Insurance, Franklin Templeton

Josh Anderson, CFA

Strategic Accounts & Innovation Director, Retirement & Insurance, Franklin Templeton

Introduction

Will it rain today in my city—or on my portfolio? Since the 1970s, artificial intelligence (AI) has assisted investors with trading strategies and meteorologists with weather forecasts. Defined as machines that mimic the cognitive functions of the human brain, AI seeks and compiles information, helps sift through data, and analyzes it to improve decision-making used in our day-to-day living. AI powers the sensors that collect data on weather, carbon emissions, traffic patterns and countless other items.

The development and deployment of AI tools continue to embed themselves into nearly all aspects of daily life. AI platforms can allow individual users to use facial recognition on their phones, get new streaming recommendations based on personal viewing patterns, ask Siri for directions while driving, and even allow cars to drive without a human at the helm. The challenge of providing such customization cost-effectively and at scale requires AI deployment to understand the interests of clients and prospects as well as the context surrounding them. Automating selections of the next “best” offer for a customer requires real-time database connections, machine-learning and orchestration.

AI can boost most investors’ scale, speed and sophistication. Wealth management profiling systems can dynamically monitor clients’ behaviors and those of their family and associates to help inform their portfolio needs using AI’s ongoing flow of information. Portfolio managers can utilize AI to monitor sentiment across analysts’ reports, earnings calls, stock-price movements, news articles and social media activities. With AI tools, a portfolio manager can identify incongruencies that may lead to large price moves or behavioral biases in trade executions, and they can also decipher in real time whether a company’s practices meet targets for pay equity or carbon footprint reduction. The quality of AI results depend on the human to submit quality queries for better usage and outcomes.

With well-designed AI algorithms, investors can produce better outcomes. However, we still need professionals to operate AI tools to both guide and gut-check their recommendations. In this issue, we provide more on the transformative power of AI in investment management, with

“Copilot, not autopilot: How generative AI augments, but doesn’t replace active management,” written by Max Gokhman, Head of MosaiQ Investment Strategy;

“Durable passive thematic strategies—A solution unlocked by artificial intelligence,” by Ralph Corasaniti, Strategic Accounts & Innovation Director, Retirement & Insurance; and

“The ripe opportunity for AI in the workplace,” by Josh Anderson, Strategic Accounts & Innovation Director, Retirement & Insurance.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.

Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology, (such as theft, loss, or destruction of cryptographic keys), conflicting intellectual property claims, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud. Portfolio managers, service providers to the portfolios and other market participants increasingly depend on complex information technology and communications systems to conduct business functions. These systems are subject to a number of different threats or risks that could adversely affect the portfolio and their investors, despite the efforts of the portfolio managers and service providers to adopt technologies, processes and practices intended to mitigate these risks and protect the security of their computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to the portfolios and their investors.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

This document is intended to be of general interest only. This document should not be construed as individual investment advice or offer or solicitation to buy, sell or hold any shares of fund. The information provided for any individual security mentioned is not a sufficient basis upon which to make an investment decision. Investments involves risks. Value of investments may go up as well as down and past performance is not an indicator or a guarantee of future performance. The investment returns are calculated on NAV to NAV basis, taking into account of reinvestments and capital gain or loss. The investment returns are denominated in stated currency, which may be a foreign currency other than USD and HKD (“other foreign currency”). US/HK dollar-based investors are therefore exposed to fluctuations in the US/HK dollar / other foreign currency exchange rate. Please refer to the offering documents for further details, including the risk factors.

The data, comments, opinions, estimates and other information contained herein may be subject to change without notice. There is no guarantee that an investment product will meet its objective and any forecasts expressed will be realized. Performance may also be affected by currency fluctuations. Reduced liquidity may have a negative impact on the price of the assets. Currency fluctuations may affect the value of overseas investments. Where an investment product invests in emerging markets, the risks can be greater than in developed markets. Where an investment product invests in derivative instruments, this entails specific risks that may increase the risk profile of the investment product. Where an investment product invests in a specific sector or geographical area, the returns may be more volatile than a more diversified investment product. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from use of this document or any comment, opinion or estimate herein. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

Any share class with “(Hedged)” in its name will attempt to hedge the currency risk between the base currency of the Fund and the currency of the share class, although there can be no guarantee that it will be successful in doing so. In some cases, investors may be subject to additional risks.

Please contact your financial advisor if you are in doubt of any information contained herein.

For UCITS funds only: In addition, a summary of investor rights is available from here. The fund(s)/ sub-fund(s) are notified for marketing in various regions under the UCITS Directive. The fund(s)/ sub-fund(s) can terminate such notifications for any share class and/or sub-fund at any time by using the process contained in Article 93a of the UCITS Directive.

For AIFMD funds only: In addition, a summary of investor rights is available from here. The fund(s)/ sub-fund(s) are notified for marketing in various regions under the AIFMD Directive. The fund(s)/ sub-fund(s) can terminate such notifications for any share class and/or sub-fund at any time by using the process contained in Article 32a of the AIFMD Directive.

For the avoidance of doubt, if you make a decision to invest, you will be buying units/shares in the fund(s)/ sub-fund(s) and will not be investing directly in the underlying assets of the fund(s)/ sub-fund(s).

This document is issued by Franklin Templeton Investments (Asia) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.

Unless stated otherwise, all information is as of the date stated above. Source: Franklin Templeton.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.