Growing Wealth in the Age of Data
Over the last century, the rate of technological progress has far outpaced any period prior in human history, and we find ourselves in the midst of incredible change. As clients are seeking wealth preservation and real growth, it is important to realise that the landscape has shifted, and the winds of change are rapidly reaching gale-force proportions.
- The rate of technological change creates exciting opportunities for investment management.
- Advancing data science through artificial intelligence (AI) and machine learning (ML), combined with the powerful computing available today, gives portfolio managers more tools to build and manage portfolios that deliver to investors’ expectations.
- Reaching beyond pure investment performance and strategies, the use of technology across the full investment value chain is proving valuable.
- The power of technology is enhanced by the people who use it. Adding human insights and creativity, the opportunities are truly endless.
Data has become the new king, the new commodity of the age and it is here, in the harnessing of this data, where the secret potentially lies to increasing our current resources so that they can meet our needs in the future. The tools of data science, artificial intelligence (AI) and machine learning (ML), combined with the powerful computing available today, represent a toolbox for many activities, including the management of our investments to achieve wealth creation and protection.
Data in investment management
The proliferation of data over the last few decades has been truly unprecedented, with the advent of the internet ushering in the data age. The sheer amount of data being created, captured, and consumed worldwide is staggering. In research done by Seagate Technologies, it was estimated that, from 2010 to 2020, the total volume of data worldwide grew from a mere two zettabytes (ZB) per annum to 64 zettabytes, where one zettabyte is equivalent to one trillion gigabytes. These numbers are almost unfathomable and are expected to continue increasing exponentially, with no sign of slowing down.
With so much data at our fingertips, it is clear that, to extract the most value, a new set of skills and tools are needed. This is where data science, AI and ML come to the fore, as key weapons in the arsenal of successful investment managers. In many ways we are entering a new commodity super-cycle, the difference is that this commodity comes in bits and bytes, as opposed to glitter and gold.
We are increasingly seeing evidence that alpha (excess return above a benchmark) is more challenging to find when investing in markets across the globe. True alpha is becoming scarcer (a topic that has been deftly covered by Swedroe and Berkin
in their book ), with research showing that most historical outperformance could be explained by exposure to various underlying risk premia or styles (Value, Growth, Quality, etc.) The ability to derive these insights and use them to construct systematic, data-driven, and unbiased investment strategies represents one of the most sustainable solutions for investors looking to grow wealth over the long term. For example, multi-style investing is rising to prominence , as such data-driven strategies have been shown to produce strong and uncorrelated alpha performance, achieve superior risk management, and accomplish all this at a low cost due to their systematic nature. The ability to leverage large, non-traditional datasets and apply the innovative techniques of AI and ML present further exciting avenues of research to improve investment performance and ultimately assist clients with building wealth into the future.
Even going beyond pure investment performance and strategies, the value-add of technology in the wider fund management process can no longer be discounted. Research conducted by the Milestone Group is compelling.
Among the global asset owners and investment managers surveyed, the vast majority rated the importance of technology in the above business areas as either critically important or very important. From implementing advanced investment strategies to supporting portfolio oversight and fulfilling fiduciary duties, it is technology overlaid upon data that ultimately ensures clients receive the best possible experience across all dimensions. Growing wealth sustainably is a non-trivial pursuit, and it is only by applying the best techniques across the entire investment value chain that you maximise the chance of success – delivering optimal financial outcomes.
Looking to the future
As we reflect on and celebrate the last 20 years of STANLIB and the impact our business has had on the South African asset management space, it is crucial that we also keep an eye on the next 20 years. As a business we are choosing to embrace technology and the tools of the future, as the world and particularly investment management shifts into a new, digital era. It is neither man nor machine that independently holds the key to our future, but rather a potent combination of both. By building this foundation of data science and computing skills within our business, and then empowering our people to leverage it with human insights and creativity, the opportunities are truly endless. This journey is ultimately for the benefit of our clients, and it reaffirms our commitment to staying abreast of new technologies in the pursuit of protecting and growing client wealth over the long-term.
As clients, it is crucial that your financial goals are aligned with the future we are stepping into and that you ask your investment managers whether their goals are similarly aligned. It will only be those asset managers who embrace these technologies, remain open-minded and have a willingness to learn and adapt quickly that will be able to best service the client needs of the future. In the words of American philosopher Eric Hoffer: “In times of change, learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.”
1 The Incredible Shrinking Alpha, 2015, L. Swedroe and A. Berkin
2 See the STANLIB Enhanced Multi Style Equity fund as an example