Investment strategies, AI and human governance

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SIMON BROWN: I’m chatting with David Crosoer, chief investment officer at PPS Investments. David, appreciate the time. It was a really fascinating and enjoyable read that you put out recently, talking around the sort of paradox of AI.

I want to delve into it, but I think the first point is a great observation that you made – that equity investors are putting AI companies on really extraordinary valuations. Debt investors are a whole lot more cautious. What is the bond market seeing that the equity market isn’t seeing?

DAVID CROSOER: I think the bond market sees the risk as bond investors typically do, and equity investors see the upside or the potential optimism from it. So, which one is right is a moot point that we’ll only know in hindsight, but both are coming from different perspectives.

I think it does point out, though, there’s a lot of uncertainty around who will succeed here, and there’s enormous success for those that do.

And maybe the last point is that the companies that are trying to succeed are pumping a huge amount of money into this; hence they’re going to the bond markets for funding.

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SIMON BROWN: Yes. And I take your point around divergence of views. When I just had a quick peek at Nvidia, we’re getting all the upgrades coming through after results, but there’s a low target price of $180/share, a high of $550/share. That is a giant spread. That’s not something we typically normally see.

In your article you talk around AI potentially sort of ‘winner takes all’ – and certainly that seems to be what we’re looking at, certainly with Nvidia as an example.

But as an investment manager as a fund manager, how do you position size for that? Or is it a case of rather take a basket than try to pick – because it’s almost impossible to know who it will be?

DAVID CROSOER: Yes. We’re a multi-manager, so we select managers who’ve got that problem themselves. I think it’s been an incredibly difficult challenging period for active managers who obviously choose some shares and who decide not to choose other shares.

No one’s really built an investment process in the last 30 years on how to pick AI winners. So we might feel managers are very good at active stock picking, but no one’s really faced this kind of an environment.

And maybe it’s highlighted to many investors, I suppose, that one of the benefits of being passive or just holding the market is that at least you’ll hold the eventual winner because you hold the whole market.

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So I think a lot of investors are combining both active and passive, and partly using passive potentially as a protection to ensure that they don’t miss out on what might be the eventual winners from AI.

Obviously, the other side of the trade is that if these shares are all at crazy valuations, the active guys will see through the hype, and it can help protect capital by not going for everything.

So it’s a really challenging time for both investors that are passive, that are holding this market that has run very hard, and active guys which have not necessarily held the shares that the market at the moment things are going to be the ones that come away with the winnings.

SIMON BROWN: Yes. Investment decisions are always tricky. This is perhaps one of the trickier over time. Part of your argument – and this is a great point – is that you said the more capable that machines become, that AI becomes, the more valuable humans become, the more valuable human judgment becomes.

That probably sounds counterintuitive to a lot of people, but it’s that premium on humanity and human judgment rather than reducing it.

AI’s actually enhancing us as it sort of takes over and is found in more places.

DAVID CROSOER: Well, I think for me the really interesting question is: does the way you win matter? So if we’re going to have certain companies which are really going to dominate – and maybe they won’t, that’s just speculative – but how you win, does that matter?

I’ve been around and you’ve been around long enough to know the ESG (Environmental, Social and Governance) movement – or trying to think around those kinds of factors which are outside investment returns – got a bit of a bad rub from people. People got a bit tired of its framing.

But it makes an important point: is the way you win as important as winning? I think there are some serious moral and governance questions around the use of AI that we should be expecting our asset managers to be asking of the companies that they’re investing in.

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This is obviously a relatively early stage, but increasingly we’re going to need to be thinking around how we apply human judgment to AI, and how these AI algorithms are potentially going to dominate our lives.

So I suppose what I was trying to argue is it’s almost like ESG is even more important, let alone for the climate crisis and the inequality crisis and all the kind of social crises we’re facing. It looks even more relevant as AI becomes more and more important.

So there’s obviously a temptation to think we can have a technological or technocratic solution to everything – and there are quite a few proponents of that in Silicon Valley and elsewhere. But it does seem that we do need to bring the human back into the thinking here.

And it doesn’t just take the Pope to tell us that. I think Bill Gates also came out recently with some concerns around how we’re applying this technology.

But the challenge for us is not only to think about picking the winners, but to seriously think how should they be winning, and how can we engage with the way they win to make sure that it’s a human, inclusive way of winning and not one that disintermediates the human completely.

SIMON BROWN: It’s a great point. I didn’t know Bill Gates had a blog. Who knew? It’s called Gates Notes. It’s actually a really, really good read – not just on his latest AI piece, but more generally. And as you referenced the Pope there as well, he had a really, really good piece that came out as well.

The point is, as you say, some decisions need to remain human. And that’s then sort of the decision process. If you look at PPS Investments and your team there, where are you looking to draw that line, or is this still a conversation that we’re trying to work out?

DAVID CROSOER: Well, I suppose all companies are thinking about how they adopt AI themselves. In our own business we, like many businesses, are using AI. It can be very effective, but we definitely have a view that the human owns the judgment, and the human judgment must be the ultimate judgment.

The human is accountable for whatever happens with the AI, and then there are a lot of ways of trying to use the AI responsibly to assist that.

It’s more interesting – well, equally engaging – with the managers and how they’re thinking around AI, and then how they’re thinking about how the companies they’re investing in are using AI, and how the rating agencies, the ESG ones, are thinking around how they should think around responsible AI use.

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This is all at a relatively early stage, so I think everyone is sort of building, trying to work out how we deploy this technology sensibly without putting things at risk; but also how we benefit from the technology and not be fearful of the technology.

So I feel we’re kind of in the middle of this. But we definitely want the human to own the decision, and I think that’s important.

And maybe just to circle back. One of the big debates I’ve always lived with in the investment world is that it doesn’t matter how we generate the returns, as long as we generate the returns, and then the client can get the returns.

Obviously there’s always been the retort of ‘But there are all these negative externalities with these returns’, or ‘How should you think around the returns?’

In a way AI is a useful test case for us as humanity to decide to what extent do we still want the human to be part of the process – or are we completely comfortable with the human being disintermediated?

Maybe that is something that as a society can reflect on, and try to ensure that it is inclusive of the human. For me, it will feel a really poor outcome if the human gets disintermediated from the benefits of this technology.

SIMON BROWN: Agreed, 100%. And I think we’re kind of doing it, I suppose in real-time in a sense, as we try and find exactly where that balance is. But I take your point, I think the human has to be involved, and I think the human also needs to be involved at that, the end point, of it.

You mentioned governance, you mentioned ESG, and of course, the ‘G’ is the governance. We’ve seen King V looking at sort of bringing AI information governance into board responsibility for the first time – and this is, I suppose, part of that debate which is happening and, in this case, happening in the boardrooms across South Africa.

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DAVID CROSOER: Exactly, and within the companies that we’re investing in, et cetera. So this is something investors can definitely engage with companies on in terms of how they’re deploying responsible AI use within their businesses and how they’re thinking around it.

SIMON BROWN: Absolutely. And I think it’s part of that process when I’m interviewing CEOs. This is now part of the ambit, I suppose, across the investment world.

But we’ll leave it there. That’s David Crosoer, chief investment officer at PPS Investments. David, appreciate the time.

#Investment #strategies #human #governance