<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
SIMON BROWN: I\u2019m 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.<\/p>\n
I want to delve into it, but I think the first point is a great observation that you made \u2013 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\u2019t seeing?<\/p>\n
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\u2019ll only know in hindsight, but both are coming from different perspectives.<\/p>\n
I think it does point out, though, there\u2019s a lot of uncertainty around who will succeed here, and there\u2019s enormous success for those that do.<\/p>\n
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\u2019re going to the bond markets for funding.<\/p>\n
Read: AI saves time but most companies waste the gain<\/p>\n
SIMON BROWN: Yes. And I take your point around divergence of views. When I just had a quick peek at Nvidia, we\u2019re getting all the upgrades coming through after results, but there\u2019s a low target price of $180\/share, a high of $550\/share. That is a giant spread. That\u2019s not something we typically normally see.<\/p>\n
In your article you talk around AI potentially sort of \u2018winner takes all\u2019 \u2013 and certainly that seems to be what we\u2019re looking at, certainly with Nvidia as an example.<\/p>\n
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 \u2013 because it\u2019s almost impossible to know who it will be?<\/p>\n
DAVID CROSOER: Yes. We\u2019re a multi-manager, so we select managers who\u2019ve got that problem themselves. I think it\u2019s been an incredibly difficult challenging period for active managers who obviously choose some shares and who decide not to choose other shares.<\/p>\n
No one\u2019s 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\u2019s really faced this kind of an environment.<\/p>\n
And maybe it\u2019s highlighted to many investors, I suppose, that one of the benefits of being passive or just holding the market is that at least you\u2019ll hold the eventual winner because you hold the whole market.<\/p>\n
Read:
\u2018We\u2019re becoming an AI-enabled organisation\u2019 \u2013 Standard Bank\u2019s Margaret Nienaber
Quality investing beyond the AI momentum boom
Nvidia becomes world\u2019s most valuable company as AI rally steams ahead<\/p>\n
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\u2019t miss out on what might be the eventual winners from AI.<\/p>\n
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.<\/p>\n
So it\u2019s 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.<\/p>\n
SIMON BROWN: Yes. Investment decisions are always tricky. This is perhaps one of the trickier over time. Part of your argument \u2013 and this is a great point \u2013 is that you said the more capable that machines become, that AI becomes, the more valuable humans become, the more valuable human judgment becomes.<\/p>\n
That probably sounds counterintuitive to a lot of people, but it\u2019s that premium on humanity and human judgment rather than reducing it.<\/p>\n
AI\u2019s actually enhancing us as it sort of takes over and is found in more places.<\/p>\n
DAVID CROSOER: Well, I think for me the really interesting question is: does the way you win matter? So if we\u2019re going to have certain companies which are really going to dominate \u2013 and maybe they won\u2019t, that\u2019s just speculative \u2013 but how you win, does that matter?<\/p>\n
I\u2019ve been around and you\u2019ve been around long enough to know the ESG (Environmental, Social and Governance) movement \u2013 or trying to think around those kinds of factors which are outside investment returns \u2013 got a bit of a bad rub from people. People got a bit tired of its framing.<\/p>\n
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\u2019re investing in.<\/p>\n
Read:
Generative AI in investment management: Game-changer or gimmick?
We asked ChatGPT, Claude and Perplexity for financial advice
Balancing AI efficiency with human expertise in asset management<\/p>\n
This is obviously a relatively early stage, but increasingly we\u2019re 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.<\/p>\n
So I suppose what I was trying to argue is it\u2019s 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\u2019re facing. It looks even more relevant as AI becomes more and more important.<\/p>\n
So there\u2019s obviously a temptation to think we can have a technological or technocratic solution to everything \u2013 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.<\/p>\n
And it doesn\u2019t just take the Pope to tell us that. I think Bill Gates also came out recently with some concerns around how we\u2019re applying this technology.<\/p>\n
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\u2019s a human, inclusive way of winning and not one that disintermediates the human completely.<\/p>\n
SIMON BROWN: It\u2019s a great point. I didn\u2019t know Bill Gates had a blog. Who knew? It\u2019s called Gates Notes. It\u2019s actually a really, really good read \u2013 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.<\/p>\n
The point is, as you say, some decisions need to remain human. And that\u2019s 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\u2019re trying to work out?<\/p>\n
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.<\/p>\n
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.<\/p>\n
It\u2019s more interesting \u2013 well, equally engaging \u2013 with the managers and how they\u2019re thinking around AI, and then how they\u2019re thinking about how the companies they\u2019re investing in are using AI, and how the rating agencies, the ESG ones, are thinking around how they should think around responsible AI use.<\/p>\n
Read:
Quality investing beyond the AI momentum boom
How Netflix is using AI to save cash
From innovation to application: AI in the business of property
Can AI change the way South Africans build wealth?<\/p>\n
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.<\/p>\n
So I feel we\u2019re kind of in the middle of this. But we definitely want the human to own the decision, and I think that\u2019s important.<\/p>\n
And maybe just to circle back. One of the big debates I\u2019ve always lived with in the investment world is that it doesn\u2019t matter how we generate the returns, as long as we generate the returns, and then the client can get the returns.<\/p>\n
Obviously there\u2019s always been the retort of \u2018But there are all these negative externalities with these returns\u2019, or \u2018How should you think around the returns?\u2019<\/p>\n
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 \u2013 or are we completely comfortable with the human being disintermediated?<\/p>\n
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.<\/p>\n
SIMON BROWN: Agreed, 100%. And I think we\u2019re 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.<\/p>\n
You mentioned governance, you mentioned ESG, and of course, the \u2018G\u2019 is the governance. We\u2019ve seen King\u00a0V looking at sort of bringing AI information governance into board responsibility for the first time \u2013 and this is, I suppose, part of that debate which is happening and, in this case, happening in the boardrooms across South Africa.<\/p>\n
Read:
\u2018AI blowback\u2019 angst grips ESG investors who bet big on tech
Empowering sustainable finance<\/p>\n
DAVID CROSOER: Exactly, and within the companies that we\u2019re investing in, et cetera. So this is something investors can definitely engage with companies on in terms of how they\u2019re deploying responsible AI use within their businesses and how they\u2019re thinking around it.<\/p>\n
SIMON BROWN: Absolutely. And I think it\u2019s part of that process when I\u2019m interviewing CEOs. This is now part of the ambit, I suppose, across the investment world.<\/p>\n
But we\u2019ll leave it there. That\u2019s David Crosoer, chief investment officer at PPS Investments. David, appreciate the time.<\/p>\n
#Investment #strategies #human #governance<\/p>\n","protected":false},"excerpt":{"rendered":"
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