South African fund managers outperform AI funds

AI investing

The latest data from NMRQL Research shows that its Artificial Intelligence (AI) driven investment funds failed to outperform South African fund managers or the market.

Artificial Intelligence has grown in prominence in the investment industry over the past decade and is widely used by fund managers today.

AI includes machine learning, where computer systems can learn and adapt without human intervention. It achieves this by using algorithms and statistical models to analyze patterns in data.

Fund managers rely heavily on data analyses, and many incorporate machine learning results into their investment decisions.

They believe using AI gives them an advantage because of its ability to analyze big data quickly and identify relationships that humans can’t spot.

Investment portfolios based on AI and machine learning are also marketed as eliminating biases influencing human behaviour.

These biases could cause irrational behaviour by portfolio managers, leading to poor decisions and losses for investors.

Another selling point is that AI-managed funds have lower management fees, which further benefit investors.

It is time to see whether the AI-managed funds lived up to their promise of higher returns and lower fees.

South African AI-managed funds

NMRQL Research is a prominent player in the AI fund management market, using “cutting-edge machine learning algorithms to make investment decisions on behalf of our investors”.

NMRQL said its machine learning-powered, computational investment process allows it to discover hidden patterns in underlying big data.

“Once discovered, these patterns can be exploited to forecast returns across all asset classes and markets, resulting in the steady long-term growth of capital and income,” it said.

NMRQL CEO Tom Schlebusch said they are changing the investment management process from a biased, human-centric investment process to a non-emotive, unbiased algorithmic-driven process that is continuously learning and adapting to changing environments.

The company has its own AI fund and also manages two funds on behalf of Absa, as shown below.

  • NMRQL SCI balanced fund – a multi-asset high equity fund.
  • Absa Smart Alpha defensive fund – a multi-asset low equity fund.
  • Absa Smart Alpha equity fund – a general equity fund.

We looked at the performance of the NMRQL SCI balanced fund and the Absa Smart Alpha equity fund to see if they lived up to their promise.

The NMRQL SCI balanced fund has thus far not had a good track record. It only managed to generate a 0.07% return over a 3-year period and lost money over all other periods.

The Absa Smart Alpha equity fund, with 99.34% domestic equity exposure, generated positive returns but could not beat its benchmark or the JSE Top 40 index.

What was of particular interest is that the fees for both the NMRQL SCI balanced fund (3.24%) and the Absa Smart Alpha equity fund (2.19%) were higher than the benchmark (1.97%).

The tables below show the performance of the two AI funds compared with their peer benchmark and equitable JSE indexes.

NMRQL SCI Balanced Fund
Date range Fund Performance Fund Benchmark Performance JSE All Share Index
1 Month -2.75% -4.48% -8.01%
3 Months -7.15% -5.71% -11.69%
6 Months -13.83% -6.54% -8.30%
1 Year -8.79% +2.80% +4.69%
3 Years +0.07% +6.61% +8.18%
Since October 2017 -0.50% +5.19% +7.21%
ABSA Smart Alpha Equity Fund
Date range Fund Performance Fund Benchmark Performance Top 40 Index
1 Year +0.20% +4.10% -1.38%
2 Year +7.96% +12.19% -0.69%
3 Year +4.87% +7.36% +4.37%
5 Year +3.16% +5.16% +4.06%