As AI and tech play a critical role in investment and wealth management, experts at BlackRock discuss their systematic approach to investing, combining tech and human expertise, highlighting that human judgment is still needed.

With $15.3 trillion in assets under management, the views of BlackRock carry more weight than most as conversations swirl about how far AI and other technologies change the way investment is conducted. 

At a media event in London yesterday, BlackRock outlined its systematic approach to investing, which combines the human touch with tech to deliver insights into diversified portfolios. Muzo Kayacan, portfolio manager of the London-listed BlackRock American Income Trust and Adam Riley, head of international wealth, set out the US firm's approach.

“It really is the combination of data, tech and human insight, the human machine combination, that is important,” Riley said. Large Language Models (LLM), for instance, can be used to track millions of online job postings to identify future growth, based on skills.

“A systematic approach is much better than it used to be,” Kayacan said. “If we look back 20 years, our models were very reliant on backward-looking data. Now we can use language models to read macro research. They can do simple, but powerful tasks. Generative AI tools are good at summarising macro themes, for instance, like the recent conflict between the US and Iran. They can capture themes and the stocks exposed to them, that give the manager an ability to navigate market turning points. When there are shocks and market turmoil, it creates mispricing opportunities. Stocks will overreact,” he said. “This has been a crazy 12 months and performance has been good. It’s been about capturing those opportunities.” 

Riley said that the role of the human in this process is about exercising judgment. “This decade gave us opportunities where the manager had to step in, like during Covid which disrupted every piece of information collected. The manager stepped in and reduced the model weight to particular parts of the model. It is that human machine team with the human stepping in to navigate the model around those new events that is important,” Riley said. “It is key to have a human involved. Every time a trade list is sent to the trading desk, the manager reviews it before sending it. It’s the judgement of the portfolio manager that is important. They are the ones responsible for performance.”

Kayacan said the firm hasn't had to cut its workforce because of AI and tech. “Humans are becoming more productive. We can ask bigger questions and have more time designing more complex insights. It used to take a certain amount of time to do a research project. We can now do it faster. AI simplifies the more basic elements of your job so you can spend more time on more complex, deep tasks,” he said.

Benefits of AI include providing data-driven advice in specific areas such as portfolio optimisation, risk management and tax analysis.

The rise of AI is a dominant theme in wealth management and wider financial services; the technology influences the client-advisor relationship, for example (as explored by the editor of this news service here.)

BlackRock American Income Trust
“Since using the systematic approach 12 months ago, the trust has been performing much better, outperforming the Russell 1000 Value Index,” Kayacan said.  

He said their data-driven investment process has navigated a US market dominated by mega-cap technology stocks while continuing to target both income and capital growth.

The London-listed BlackRock American Income Trust mainly invests in large and mid-cap North American equities, diversified across financials, healthcare, industrials and tech. Top holdings include US tech giants Amazon, Apple, Microsoft as well as JP Morgan Case, the Bank of America and Proctor and Gamble.

The trust’s net asset value (NAV) returned 5.0 per cent in June, outperforming the Russell 1000 Value Index which returned 3.8 per cent net of fees. The NAV also returned 38 per cent annually, against 30.9 per cent for the index. AI infrastructure demand continued to influence the equity market, particularly for semiconductor equipment, memory, optical connectivity and data-centre infrastructure.

Positive sector contributions to portfolio performance came from positions in IT, financials, consumer discretionary, communication services and industrials. In IT, overweights in semiconductor equipment and semiconductor manufacturers were the main driver as AI-related capital spending supported the sector. Overweights in banks were also rewarded as the outlook for interest rates remained supportive for net interest income.

Christopher Rossbach, CIO at J Stern & Co also sees AI as complementing the manager's role, making processes more efficient rather than replacing the human element. He thinks the human touch and judgment will still be needed.