[With the increasing number of new investment management technologies coming into the asset management industry, it’s not just the new technology that deserves the scrutiny but specifically how it is being fused into the investment process. It’s both interesting and revelatory to see how an innovation works its way into incumbent status-quo thinking and current ways of doing things. With artificial intelligence (AI), it may also be disrupting other quant strategies in its wake, like factor investing to name one.
Mondrian Investment Partners is an international value-oriented investment manager based in London that has been launching new products and expanding their presence in the US. One of these new funds, which caught our eye, is the Rothko Emerging Markets Equity Fund (RKEMX) — an artificial intelligence-based emerging markets equity mutual fund. Especially interesting is the way their investment division — Rothko Investment Strategies also based in London — is applying AI, as they characterize it, as a defensive value-driven tool. Their unique application in emerging markets and in the quant world in general warrants greater inquiry and exploration. The Institute for Innovation Development decided to reach out to Dan Philps, head of investment strategies at Rothko to learn more. Come let’s explore this together…]
Hortz: How did you come up with the idea for your AI approach for your Fund?
Philps: Research into the methodology underlying Rothko began in 2007 and was the brainchild of Mondrian's Executive Chairman (and founding CEO), David Tilles. The idea was developed levering off the organization’s vast experience of identifying value opportunities in global equity markets and made possible by the recent explosion of high quality data and computing power. The aim of the research was to systematically replicate the best of human decision making, encapsulating tried and true value investment rationales centered on defensiveness and future income generation with an AI type of approach. We believe AI offers another way to drive fundamental investing but in an objective way.
Hortz: How did you actually build your AI program? What was involved and can you share your experience in developing it?
Philps: It was a long journey to develop Rothko. David Tilles’ vast experience as founding CIO of a successful fundamental shop and my twenty years of quantitative investing and AI research was a prerequisite. Our starting point was to define a solid, underlying philosophy — income orientation and value investing. We then examined how a best of breed, human-driven manager achieved defensive returns and strong outperformance and we identified two key points that helped us design Rothko’s investment strategies.
Firstly, we found that consistently good, human stock selectors tended to use a systematic fundamental approach to identify opportunities, rather like Warren Buffet’s approach. Secondly, we found that people generally made poor portfolio managers, suffering from behavioral biases, such as anchoring where stocks are held too long. This has led us to use AI to drive a rules based stock selection approach and use an AI approach to learn when to trade. It is an approach that aims to be both consistent and objective. We believe the results have been impressive.
Hortz: How does the AI program learn and can you moderate or adjust its learning?
Philps: Rothko learns steadily through time and has memories of the shape of crises and opportunities of the past to guide future decision making. My experienced portfolio management team monitors portfolios in real time but we have rarely had to override the approach. This is mainly because Rothko only needs to learn information it does not already know and because the system is already very powerful, that means the learning process tends to be slow and steady.
Hortz: What specifically has your AI “learned” so far about shaping a systematic value approach to international and emerging market equities?