Vanguard relies on AI to boost its equity funds

Vanguard Group is considered the world’s second-largest asset manager. It has recently unveiled that it has integrated AI into several of its active equity funds for a year. This initiative includes four factor funds which represent 13 billion dollars in assets under management.

The world’s second-largest asset manager quietly added artificial intelligence to four of its stock funds a year ago https://t.co/UHQ0BIiOZ8

— Bloomberg Crypto (@crypto) February 7, 2024

What is factor investing?

Factor investing involves selecting stocks based on certain factors:

• size,
• value,
• quality,
• momentum,
• low volatility…

These elements explain the outperformance or underperformance of certain stocks. They serve as sources of diversification and risk-adjusted return.

Vanguard offers four factor funds, which were launched in 2018, included in the AI project. These are:

• the Vanguard Global Minimum Volatility Fund,
• the Vanguard Global Value Factor Fund,
• the Vanguard Global Momentum Factor Fund,
• the Vanguard Global Liquidity Factor Fund.

They combine several of these factors with variable weightings.

How does AI intervene in these funds?

According to Vanguard, AI intervenes at two levels in these funds:

• It helps with portfolio construction. To do this, AI optimizes the weightings of factors and stocks according to performance and risk objectives.
• The artificial intelligence contributes to risk management by detecting anomalies and regime changes that could affect the funds.

Thus, AI allows funds to adapt more quickly and effectively to changing market and economic conditions. It utilizes the new language capabilities and data analysis provided by machine learning.

What are the results of this AI experiment?

According to Vanguard, AI has had a positive impact on the performance and stability of the funds. According to data available on its website, the four factor funds have shown returns above their benchmarks over a year (with the exception of the value fund, which slightly underperformed).

“AI has not replaced human managers. It has assisted them in their decisions, providing information and recommendations.”

For Vanguard, artificial intelligence remains a mere complementary tool.

It is a pilot project for Vanguard. Indeed, the company does not intend to extend the use of AI to other funds at the moment. However, it will continue to explore opportunities offered by AI and other innovative technologies.