Vanguard Group is considered the second largest asset manager in the world. It has just revealed that it has integrated AI into several of its active equity funds over the past year. This initiative concerns four factor funds which represent $13 billion in assets.
What is factor investing?
L’factor investing consists of selecting stocks based on certain factors:
- size,
- value,
- quality,
- momentum,
- low volatility…
These elements explain the outperformance or underperformance of certain securities. They serve as sources of diversification and risk-adjusted returns.
Vanguard offers four factor funds, launched in 2018, included in the AI project. These are :
- the Vanguard Global Minimum Volatility Fund,
- the Vanguard Global Value Factor Fund,
- the Vanguard Global Momentum Factor Fund,
- the Vanguard Global Liquidity Factor Fund.
They combine several of these factors according to variable weights.
How does AI intervene in these funds?
According to Vanguard, AI intervenes on two levels in these funds:
- It helps to portfolio construction. To do this, AI optimizes the weightings of factors and actions based on performance and risk objectives.
- Artificial intelligence contributes to risk management by detecting anomalies and regime changes that could affect funds.
AI thus allows funds to adapt more quickly and more effectively to changing market and economic conditions. It exploits the new linguistic and data analysis capabilities offered by machine learning.
What are the results of this AI experiment?
According to Vanguard, AI has had a positive impact on the performance and stability of funds. According to data available on its site, the four factor funds posted returns higher than their benchmark indices over one year (except for the value fund, which slightly underperformed).
“AI had not replaced human managers. She assisted them in their decisions, providing them with information and recommendations. »
For Vanguard, artificial intelligence therefore remains a simple complementary tool.
This is a pilot project for Vanguard. Certainly, the company has no plans to expand AI to other funds at the moment. On the other hand, it will continue to explore the opportunities offered by AI and other innovative technologies.
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