Neil Constable

The evolution of cloud computing, artificial intelligence and data availability will disrupt and upend the entire asset management industry, said Neil Constable, head of quantitative research and investments at Fidelity Investments, during the Canadian Investment Review‘s 2023 Investment Innovation Conference in November.

“Yesterday’s alpha is today’s beta [and] today’s alpha is tomorrow’s beta,” he said, noting asset managers that have done the best job of being proper active alpha shops over the last decade have increasingly invested in the quantitative skillset alongside rigorous fundamental analysis. “[Their] job is to use every tool at [their] disposal to generate alpha for clients.”

Read: Institutional investors turning to AI, data science to improve processes, yield alpha

The most successful active managers break up the investment process into its core components and ensure they’re the absolute best in the world at each of those components independently and then put it all together into an alpha-generating machine, said Constable, adding he doesn’t think an artisanal approach to portfolio management will create long-term sustainable alpha.

Much of the alternative data out there — from cellphone towers to various forms of online activity — is typically very narrowly focused on a very small subset of companies, he said, adding what’s more important is figuring out what that data is good for and how to get it into the hands of the people who can use it to produce returns.

For example, quant models based on credit card data are good for forecasting revenues and same-store sales to a certain extent, while email receipts can provide data on online activity and transactions and cellphone tracking can provide daily, monthly and annual foot traffic in stores or restaurants. “Active management comes down to what to buy, what to sell and when. That’s what we’re doing. Ideas can be coming from . . . fundamental analysts, fundamental portfolio managers [or] quant models.”

Read: OPTrust stays ahead of the curve on artificial intelligence

Capturing the best ideas takes a multidisciplinary approach that requires a division of labour and different types of expertise. Institutional investors that aren’t taking seriously the concept that they’re required to be good at each and every piece of the investment process will have a difficult time competing with those that do.

“Many of these funds that have put up huge numbers for the last 10 years and continue to . . . raise their fees . . . [are] offering up something no one else can offer, . . . [which is] great outcomes and high-quality products with consistency. It’s undeniably a value to many institutional investors.”

Read more coverage of the 2023 Investment Innovation Conference.