- There is a growing interest in investing in new technologies, digital and payments innovations and robotics on the international financial market. Recently CFA Institute decided to include tests about artificial intelligence and robo-advisors into the CFA Exam. Having been engaged in financial market for the past 30 years, could you share you views about how new technologies could change the financial system, in special investment and bank business? Should we expect that technologies will replace people in banking and investment industries?
- The process is occurring as we speak. We added more specific content on financial technology (FinTech), artificial intelligence, because we constantly look at how to keep the relevance of the CFA program, how to make sure what we try to examine and teach students is going help to them in the years to come. And there is no doubt that technology is part of that.
Do I think that robo-advisors will be displacing people? Maybe! Maybe there will be some displacement wherever you can commoditize the situation. Essentially what robo-advisors do is assess risk tolerance on-line. Once they have that, then there is a very formal way in which they can adopt an asset allocation: pure high risk, low risk, medium risk. So it is a way of trying to make more efficient process of establishing risk tolerance.
The problem is - is that better than me sitting across of you and watching how you are answering the questions? Looking at you I can see that you may be not sure about something. What you lose with robo-advisors, potentially what you lose, is that context in which people fill out the form. If I ask my mom to fill out the form online, she would be grumbling that I am not sure about that, or what they mean by that. Without that facility to actually understand the question and see the response, you can end up with poor outcomes.
I don't think robo-advisors differ from anything else in terms of outcomes. If it is poor system with poor imputes, you will inevitably end-up with poor outcomes. The way that I tend to look at this is what we call role of human in technology. It is someone sitting there, making sure that whatever has been put into the system reflects both one's intuition, experience, as well as the benefits of having the stronger process around it. That is why I think it is important that we have integrated the technology into the curriculum, but it is not at the expense of other things. It is adding to what we try to get people to focus on, on their skill set, on their experience, and it is giving a better way of actually putting them into practice.
- The CFA study tells about the aging of the population and about the growing of the pension assets all around the world. And there is some deficit, demand on assets managers. Should we expect that robo-advisors will take over this investment profession or some part of it? For instance public pension assets will be managed by robots while private assets by people?
- It remains to be seen.
I don’t think there should be situation, in which public assets are managed one way and private assets - the other. Both sources of pension assets are equally valued and application of robo-advisors should be seen in the context of pooled retirement schemes in general.
Besides, many depend on what investment manager's skills are applied within the process of asset management. Is it unique knowledge of company or knowledge of asset allocation? May be it is experience or ability to interview management and to understand what they are saying, what they are doing or may be it is ability to put various unrelated macro events together and suddenly find the connection. I think as long as assets managers can show and demonstrate that they can add value, they can be involved in the process. If they do not add value then inevitably people and corporate sponsors will look to other ways in which they can provide that service and robo-advisor may be part of an alternative solution.
One more point about robo-advisors, they need not necessarily displace investment managers. They may have their own role to play. Such role can be seen in application of the big data analysis. They can be used as an artificial intelligence to the extent of pattern recognition and help managers deal with huge sources of information and find ways of managing that information. But yet then managers have to use their skills to come up with the outcome.
What I don't like, the systems, which are completely deterministic, where all the processing is done within the black box environment which speed-up the answer and you really have no idea what is going on within that processing engine. We have to be very careful about how we adopt that sort of technology.
- Blockchain technology and cryptocurrency are erasing the boundaries for private capital. What CFA Institute opinion about these technologies? Should governments try to regulate the usage of these technologies?
Yes, it is a big question, particularly the last one - how governments should react to such novels? Besides, I would observe blockchain technology separately from cryptocurrencies.
Cryptocurrencies, I think, are an legitimate investment alternative, but they purely speculative at this point of time. I don't think you can assess what an underlying value to it is. You could argue what the fundamental value of the bitcoin. It is really more amount of energy that needs to go to find the answer than to actually generate the bitcoin, and that is why we see massive bitcoin factories springing up in China using source of energy to generate this sort of outcomes. So, generally, I tend to look at that as somewhat speculative.
That said, I still encourage people to be aware and to be open to these ideas. That is because the underlying technology, the blockchain itself, I think, is fundamentally important to where system will be going in the next 10 to 20 years. I think the application of the blockchain we yet to see. Some people have likened it to where we were with the Internet 20-25 years ago. At that point it was quite difficult to explain to someone what TCP/IP protocol was, what was the Internet, how it worked, what technology was being used in the system and so on. All these things we straggled to explain than and now there is no more questions on the Internet. It is just something we have and I suspect that development of the blockchain will be similar, that it will become so fundamental to some business processes that we have, particularly where it is revolving around commoditizing processes. It is almost like the an essential utility that we have and I think the elements of the blockchain, which if handled correctly and developed correctly, could well become that. So I do really encourage people to learn, and to try to understand what the underlying technology because it is important.
- What are the other challenges except for technologies do investment managers face? In CFA Institute research it is mentioned the assets revenue decrease and low trust to finance industry.
If to talk about declining yields there are two aspects. One is the market itself. The yields are what the market offers you and the current yields are low largely because of central bank's pumping of massive amounts of liquidity into a system, depressing yields to the level we have. That is one interpretation. Another interpretation is that there are so massive savings in the world at this point of time, that yields are where they are.
The second aspect is a trust. I have looked to opportunities in Ukraine and the yields on offer are fantastically attractive to some investors if you have that second element which ultimately underpins everything.
It is very difficult to persuade people that 20% is a reasonable yield unless they understand or have trust in a system by which it is valued and a system by which they can claim that asset in case of problems or default. It is easy to invest in places, the difficulty is how you take the money out, how you crystalize investment. That is why I think unless international investors have confidence in the second part – how they can get their money back - it is very difficult to see how they can take advantage of the yield situation. So the yield will remain elevated.
There will always be some investors who are prepared to take the risk. But in terms of mass mobilisation of investment funds internationally it really comes to a trust in a system, to the rule of law, title to property, title to shares, title to claim on assets. If trust in a system is established the yield premium in Ukraine will fall. It will inevitably fall, because now you have to take care of liquidity premium, of government risks, of forex and others risks.
- For many years you’ve been working at Merrill Lynch and have been developing strategy of investments in Europe. Taking into account mentioned by you luck of a trust in a system in Ukraine, is there any interest of your clients to the assets in Ukraine?
This issue doesn’t close all the possibilities. But, as I said, if people have confidence in the rule of law, rule of title, claim on assets, than any asset can be invested in.
I think fixed income is usually starting point. Why it is that, because when the sovereign starts to issue bonds than corporations follow the same route. Besides, bonds have higher claim on asset, so there is generally grater appetite on that. But certainly within the Ukrainian situation the fundamental demographic profile, the raw material profile and the economic profile, the equity stories should be equally compelling, if no more so. Private equity the same, infrastructure assets the same, commodities the same. I don’t regard that there are certain areas that are totally off-limits to the international investors, as long as the confidence is there. We keep coming back to that trust issue. Transparency and trust are elements that underpin and unlock everything beyond that. I don’t think that there is any asset cluster that invest-appeal or can be available if that solid base is not in place.
- Today you’ve participated in discussion should Ukraine continue building its own stock exchange or if it is better to liberate capital market. Looking to our history, there were no IPOs on the Ukrainian capital market while we had many successful stories on the foreign markets. Besides we see now that many IFIs are actively placing notes in hryvnias on the London and Luxemburg Stock Exchanges. If there is a low trust in the system in Ukraine, do we really need to develop our own capital market from your point of view?
Personally I think yes, both options are required. I don’t think there must be a total reliance on ability to source finance internationally. I think if the conditions were in place to successfully offer securities to international investors then the conditions should also be in place for domestic investors, because what international investors will demand it terms of transparency, reporting, visibility of assets are exactly what should be relevant to domestic investor base and there is absolutely no reason why that shouldn't be developed. I think it is important that it is developed. I am not saying it will be quick, rapid. It will take a long time, but certainly I don’t think people should be thinking of just going to international market, you have somehow to mobilize the domestic investment base as well as give that opportunity to domestic investors. Not everyone domestically is going to be in a position to invest internationally. They need to be allowed for that domestically.