Marks: AI won’t render active managers obsolete

In his latest memo, Oaktree Capital Management’s Howard Marks examines how securities markets “seem to be moving toward reducing the role of people” – and concludes that for the best active managers, their days are not numbered.

Marks surveys developments in passive investing and exchange-traded funds, quantitative and algorithmic investing, and artificial intelligence and machine learning.

“It’s important to note that the trend toward passive investing hasn’t occurred because the returns there have been great,” Marks wrote. “It’s because the results from active management have been poor, or at least not good enough to justify the fees charged.”

Barring a drop in fees from active managers, an increase in active managers becoming capable of delivering alpha, or markets becoming easier to beat, Marks doesn’t see the trend toward passive investing abating. But those alpha-generators who earn their fees will continue to be in high demand.

“Computers can do an unmatched job dealing with the things that can be counted: things that are quantitative and objective. But many other things – qualitative, subjective things – count for a great deal, and I doubt computers can do what the very best investors do.”

These investor attributes include the ability to “sit down with a CEO and figure out whether he’s the next Steve Jobs”, and to sort through venture capital pitches to determine which could be the next Amazon.

Marks also notes quantitative investing’s emphasis on profiting from short-term dislocations, leaving great scope for superior active investors to make “value-additive decisions” for the long run.

“I have no reason to believe computers can make these in a superior way,” Marks wrote.

“The greatest investors aren’t necessarily better than others at arithmetic, accounting or finance; their main advantage is that they see merit in qualitative attributes and/or in the long run that average investors miss.”

Marks stresses that computers, artificial intelligence and big data will help investors make better quantitative decisions by furnishing them with more information. He also adds his “confidence that our jobs are safe is not unlimited”, given the level and speed of technological advancement. Private asset classes are somewhat insulated for the time being, given quantitative investing and artificial intelligence’s need for vast amounts of data and the scarcity of such data in private, non-traded asset classes.

What’s more, should the day come when “intelligent machines run all the money”, the effect will be the same as that of index investing, namely, delivering an average return with no ability to outperform.

“What, then, will be the route to superior performance? Humans with superior insight,” Marks wrote. “At least that’s my hope.”