This article first appeared in ETF Insider, to read the full edition, click here.
In today’s fast-evolving financial landscape, Artificial Intelligence (AI) has revolutionised how systematic portfolios are crafted. The ability of AI to process vast datasets with remarkable speed has spurred a shift towards data-driven asset allocation, sparking a discussion about the future role of traditional discretionary management in investing.
AI proves to be an asset, despite some common negative misconceptions. At ACCI Capital Investments, we do not see this as an either-or debate but as a powerful synergy.
By blending AI-driven insights with human expertise, we combine both approaches to optimise portfolio performance. This integration enables us to use AI to systematically capture trends, while our portfolio managers interpret complex, unforeseen events such as geopolitical risks and market shocks.
Together, this hybrid approach offers a balanced, adaptive investment strategy that combines the precision of AI with the contextual depth that only experienced managers can bring.
Using ETFs as an optimal investment vehicle
Our portfolio construction relies exclusively on ETFs owing to the unique advantages offered by the wrapper. ETFs offer:
Cost efficiency: Lower fees compared to many actively managed funds, allowing a greater share of returns to be retained by investors.
Real-time trading: The ability to trade ETFs throughout the day enables quick adjustments in response to changing market conditions.
Transparency: Regular disclosure of ETF holdings enhances risk management and investor confidence.
Flexibility: ETFs allow us to construct precise exposures across diverse sectors, asset classes, and geographies, supporting our strategic objectives. These benefits make ETFs an ideal choice for achieving efficient, flexible, and cost-effective portfolio management, aligning well with our approach to dynamic and responsive investment strategies.
The asset allocation process: Balancing strategic and tactical adjustments
Our asset allocation process is built on two core components: strategic asset allocation (SAA) and tactical asset allocation (TAA).
SAA: Establishes the target percentages for each major asset class, providing a stable, long-term framework across equities, fixed income, and other investments. SAA is focused on achieving a balanced, diversified portfolio for sustainable growth.
TAA: Enables targeted adjustments within the SAA structure to adapt to market opportunities and risks. TAA refines equity exposure based on sectors, regions, and factors, while managing fixed income according to credit quality. This flexibility al[1]lows us to optimise the portfolio as market conditions evolve.
To guide TAA, we rely on proprietary, AI-driven risk indicators, which offer two main advantages:
Complex pattern recognition: AI helps us identify non-linear relationships and hidden correlations that human analysis alone might miss.
Reduced behavioural bias: By removing subjective biases like overconfidence and anchoring, AI-driven insights support more objective, data-based decisions.
Our TAA is further supported by a discretionary approach grounded in four pillars:
Macroeconomic pillars: Growth, inflation, and employment trends set the broader economic context.
Valuation metrics: Assessing asset richness or undervaluation informs entry and exit points.
Corporate earnings: Tracking earnings serves as a market health indicator.
Technical indicators: Key signals for portfolio rebalancing and responsiveness.
Owing to this strategy, our three proprietary funds have achieved first-quartile performance so far this year versus their peer group.
Our approach of maintaining a predominantly long position in equities and a short duration in fixed income has proven effective, delivering strong returns in a challenging market environment.
The past few years have tested these strategies. The world economy has faced profound disruptions – from the pandemic to geopolitical tensions like the Ukraine-Russia conflict and China’s zero-COVID policy – spurring inflationary pressures that central banks have aggressively addressed.
As interest rates normalise, major economies face new questions about growth and stability. Adding to this complexity, Trump’s recent victory has amplified the focus on fiscal spending and raised concerns about tariffs in a world already trending towards deglobalisation.
Increased fiscal measures may stimulate short-term growth, but proposed tariffs could disrupt global trade and strain supply chains, reshaping economic alliances and impacting market dynamics.
Evolving ETF landscape
Despite these challenges, the ETF landscape continues to evolve, offering us an increasingly sophisticated toolkit.
Active ETFs are now able to address limitations seen in past, solely passive ETFs, providing flexibility and tactical opportunities that were previously constrained.
Additionally, the rise of factor-based ETFs, such as quality-focused vehicles, enhances our ability to navigate complex environments with precision.
Through these advancements, our strategy remains adaptable, cost-effective, and primed to capture growth while mitigating risk – reinforcing our commitment to building robust ETF portfolios that reflect the complexities of today’s markets.
This flexibility is likely to attract some active fund investors to the world of ETFs. With their ability to adapt quickly to market shifts and offer targeted exposures, ETFs now provide options that rival the customisation of traditional active funds, appealing to investors seeking both agility and cost efficiency.
Alberto García Fuentes is head of asset allocation at ACCI Capital Investments
