In our article published in September 2019, the VCM group introduced you to Management by Artificial Intelligence (AI) and its increasingly important role in our everyday lives. . We also talked about the growing share of AI in investment funds around the world.
We are living in an exceptional time, where many things are called into question: the ecology of the country, the dogma of growth,the dependence on certain markets,the weakness of some countries in terms of health, the weakness of humanity in the face of the Covid-19.
AI is est obviously est involved in this reflection and has become a key element in the evolution of societies in the face of these new challenges. AI has fully integrated into the way we live without us even noticing it..
Victoria Capital Management has chosen, for more than a year, to take the gamble of launching its fund managed solely by artificial intelligence . Since May 2019, the management is done in collaboration with a London company: A.I Machines. It has to its credit the first UCITS fund managed solely by AI, as well as the longest track record with une a “live” management started in 2015.
In order to offer more choice in terms of risk profile, the range of funds managed by AI at VCM is divided into two classes: Skye AI Conservative and Skye AI Dynamic..
Skye AI Conservative: This fund is aimed at investors with a strong risk aversion. . Indeed, the maximum exposure on equity markets is 25%. Exposure to commodities for up to 10% of the portfolio is permitted.. But if the analysis of market conditions requires it (by the AI),the bond allocation of the fund can be increased up to 100%. The possible difference will remain in cash..
Skye AI Dynamic: for investors with a stronger appetite for risk. The fund will have more flexibility in its equity allocation, up to 60% of the total portfolio, but could just as well be totally divested of the shares and be exposed only to bonds up to 60% and, on the “commodities”, up to 25%. The difference will remain in cash.
The value of using AI is of course the ability to analyze large databases by the machine in order to make the best investment decisions. Decisions that will also be unbiased by human factors such as feelings of panic or euphoria.. These feelings will be all the stronger in the times we are currently living and often lead to irrational behaviors. .
In order to assess the effectiveness of AI management, let’s compare the performance of the two funds against their respective benchmarks.. For the “Conservative” profile the Morningstar Cautious Index and the Morningstar Moderate Index . These 2 indices represent the average performance of investment funds that have similar strategies.
We find that in 2019, there is no significant demarcation. All asset classes were up in 2019, the majority of players,and so their funds performed pretty well. But it is during recent events, following the spread of Covid-19, an exogenous factor par excellence, that the difference becomes clear. Indeed, by analyzing the evolution of the exposure of the Conservative profile over the last month,we see a strong exposure to non-risky assets, while maintaining a sustained activity (Trading) on the equity exposure in order to make the most of the volatility of the markets.. Same scenario for the Skye AI Dynamic fund. To illustrate and compare its performance we chose the Morning star Flexible and Aggressive indices. The difference is clear when markets are strongly shaken.
Being more efficient is obviously a good thing but what about the risk?
Again, AI management stands out..
The volatility of the Ai Conservative fund over the period from May 2019 to date stands at 1.9% against 3.12% and 4.71% for the benchmarks. The AI Dynamic fund’s share is 2.77% compared to 4.58% and 6.02% for benchmarks.
The unbiased nature of the machine allows the positions to be cut before the loss is too large, thus limiting the maximum successive loss (max draw down or MDD).
The AI Conservative fund recorded an MDD of 5.17% over the period against 10.59% and 17.02% for its benchmarks. Similarly for the AI Dynamic fund, we see an MDD of 7.10% against 16.75% and 22.02% for the average of similar funds. . That’s almost 50% less for both strategies!
The VCM teams in collaboration with AI Machines are very happy to present these 2 funds that are today reference. A bet on another approach to asset management where the human being intervenes only when he decides to subscribe or buy back the fund.