Artificial intelligence is increasingly used by asset managers to help assess risk and make portfolio choices. A growing number of institutional investors have taken up this approach, with one notable example being Deepwater Asset Management, a Minneapolis-based firm which launched ‘Intelligent Alpha’ in 2022. This AI-driven model utilizes generative AI (GenAI) models to make long-term investments solely based on fundamental business performance.
The brainchild of managing partner Doug Clinton, Intelligent Alpha employs a committee of generative AI systems, including ChatGPT, Bard, and Claude. The system is designed to avoid the pitfalls of “emotional mania buying and panic selling”, a strategy similar to the one advocated by investment legends Warren Buffett and Charlie Munger.
Clinton’s results are impressive, with Deepwater’s portfolios competing favorably against well-established benchmarks such as the SPDR S&P 500 (SPY) and the NASDAQ-based Invesco QQQ Trust (QQQ).
The approach utilized by Deepwater Asset Management shares similarities with the tried-and-true investing philosophy of Warren Buffett and Charlie Munger, attracting attention for its focus on selecting robust companies and holding onto them for the long haul.
However, there are potential caveats and uncertainties to consider. For instance, it remains to be seen how Clinton’s portfolios will perform under more stressful market conditions. While they outperformed their benchmarks during market downturns in the past, a longer period of deeper losses could pose a serious test to the Intelligent Alpha strategy.
Clinton has not disclosed all the contents of the portfolios. The Intelligent Large Cap Conviction portfolio, for example, consists of just 30 stocks compared to SPY’s 504, making it relatively easier to achieve higher performance. Additionally, Clinton’s holdings include the “Magnificent 7” tech mega caps, which comprise about one-third of the S&P 500’s market weighting.
In spite of potential challenges and uncertainties, Clinton remains confident in the contrarian approach of the Intelligent Alpha model, which actively seeks to avoid data overload while focusing on identifying and investing in great companies. It’s a novel approach to AI-powered investing that has already showcased its potential.