How AI Investing Sets Up Here

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How AI Investing Sets Up Here

Every few months we do a drop-in on a US listed exchange traded fund that uses IBM Watson artificial intelligence to pick US stocks called, appropriately enough, AI Powered Equity ETF (AIEQ). Here’s how the fund has done recently:

  • Year-to-date (very good): +15.4% versus +11.7% for the Russell 3000
  • 3-month (bad): -2.2% vs. -0.8% for the Russell 3000
  • 1-month (bad): -6.7% vs. -5.3% for the Russell 3000
  • 5 day (bad, but not horrible): -2.7% vs. -2.4% for the Russell 3000

This return data shows one thing clearly enough: artificial intelligence can get it wrong just like a human portfolio manager. The question now is how the system is adapting its strategy for a more volatile and challenging investment environment.

That’s a tough one to answer, because like all AI systems there’s no one to ask. As an aside, that’s an important fiduciary hurdle for any AI-based technology when it comes to investing.

What we can do, however, is look at the AIEQ portfolio for some clues about how “the machine” is setting up its portfolio right now. Five points here:

#1: AIEQ has always run a pretty concentrated book, and it continues to do so. There are just 126 names on the pad right now, in line with other times we’ve reviewed the portfolio.

#2: It has a notable overweight to midcaps and is most underweight large caps:

  • AIEQ weighting to mid caps: 26% vs. 11% in the Russell 3000
  • Weighting to large caps: 60% vs. 75% for the Russell 3000
  • Weighting to small caps: 9% vs. 7% for the Russell 3000

#3: AIEQ is sticking with Growth over Value/Blend: Its growth weighting sits at 69% vs. 62% for the Russell 3000.

#4: Despite recent volatility, AIEQ is sticking with a Tech overweight and is most underexposed to Health Care, Industrials and Real Estate:

  • Tech weighting of 25% vs. 20% for the Russell 3000
  • Health Care: 11% vs. 14%
  • Industrials: 8% vs. 10%
  • Real Estate: 1% vs. 4%
  • All other sectors within 1% of the Russell benchmark we’re using for comparison purposes

#5: The top position for AIEQ just now is cash (4.1%), followed by these 10 names:

  • Google (GOOGL): 3.4%
  • SS&C Technology (SSNC): 2.3%
  • NetApp (NTAP): 2.3%
  • Amazon (AMZN): 2.0%
  • Johnson & Johnson (JNJ): 1.9%
  • Brown-Forman (BF.B): 1.8%
  • Apple (AAPL): 1.7%
  • Aaron’s (AAN): 1.6%
  • Costco (COST): 1.6%
  • SVB Financial (SIVB): 1.6%

Summing up: AIEQ is a useful benchmark for active managers and asset allocators because its investment process is purposefully different from traditional approaches. And while we can’t peak behind the curtain, we can see the end result.

The data above shows a cautious approach (4% cash), a Tech sector overweight (500 bps), and a focus on growth-y mid cap names rather than large caps. To us, that says that AIEQ is trying to navigate the current volatility by staying away from S&P 500 names (most exposed to trade wars) while still maintaining enough beta exposure to benefit from any rally to come.

If that sounds almost human to you, we would agree.

For AIEQ holdings: