AI DOA in beating S&P, FYI
Now that pitches about the stock market’s 2023 outlook have run their course, my email box is blitzed with invitations from publicists to write about artificial intelligence. AI sounds impressive until you realize how much trouble it has understanding two of life’s basics: food and humor. A Thanksgiving meal cooked up by AI was terrible. Even the fanciest AI cannot decipher what’s going on in New Yorker cartoon captions.
At least AI is useful for playing the stock market. Wait, it’s no good at that, either.
Exhibit A is the AI Powered Equity ETF, ticker AIEQ. It’s an unusual investment fund that uses artificial intelligence to select stocks. Bereft of emotion, AIEQ doesn’t hesitate to change the number and types of stocks it buys. It manages about $100 million, and its favorites nowadays include Delta Air Lines, Lyft and Southwestern Energy.
Last year, when the S&P lost 19%, AIEQ lost 32%. Even a machine can have a bad year, I suppose. But AIEQ has been a lousy performer for a while.
Over a five-year period it underperformed the Russell 1000 Growth Index by an annualized 6.1 percentage points, according to fund-tracker Morningstar. AIEQ “took on elevated risk, contributing to the bad outcome for investors,” Morningstar said in a report last month. In other words, the computer algorithms swung for the fences and missed more than Giancarlo Stanton.
AIEQ, like many ETFs and mutual funds, had a tough year in part because it doesn’t sell investments short—which was the best way to make money. Also, AI’s speed and intelligence don’t seem so useful when pitted against the many investment pros all using their own fancy gadgetry to look over the roughly 6,000 publicly traded companies. With the same cud getting chewed over and over, AIEQ tries to time the market just right. Its inability to do that is human, all-too human.
There’s no advice I can give when it comes to playing the market, but on marketing I have some: AIEQ must cut its 0.75% management fee, which is 15 times more than an S&P index fund. If the computer can’t see the wisdom of a well-deserved pay cut, its board needs to impose one. I wonder if the algorithms would then be artificially intelligent enough to take the hint and find a new job.