Tuesday, 21 September 2021 Reading time : 4 minutes

The digital age has produced vast amounts of data. The International Data Corporation estimates that the world generates more data every two days than the entire human race generated since the dawn of time until the year 2003. More than 10,000 reports, news and social media stories for international companies are published daily on the financial services platform Bloomberg. This Big Data revolution opens up new opportunities, especially in the financial sector.

Ideal addition to a traditional portfolio
Artificial intelligence-based algorithms are able to process these vast amounts of data. They thus tap alpha sources that were previously hidden from us due to their high complexity. These strategies adapt quickly and dynamically to changing market conditions and can also generate excess returns during difficult periods - such as the IT bubble, the financial crisis or the Corona pandemic. These new alpha sources are promising and only slightly correlated with the returns of traditional investment strategies that follow a fundamental approach. Compared to systematic investment strategies, which usually have permanent style biases such as Value or Quality, strategies based on Artificial Intelligence do not have permanent style bets.

Adding them to a traditional portfolio increases diversification by adding uncorrelated alpha sources and by basing stock selection on a completely new approach.

Investment decision
The investment decision is made by the AI algorithm in    Zürcher Kantonalbank's asset management. Huge amounts of data serve as a basis: For 7,000 stocks, the algorithm has 400 different company key figures at its disposal in monthly frequency over the last 25 years. The training set thus consists of 1 billion examples. Examples, from which the algorithm can derive patterns. Every month, 3 million new data points are added so that the algorithm can continue to develop.

Over time, the AI algorithm learns which data is relevant in which combinations and which market phases. Thus, for each stock, a forecast is generated as to how high the probability is for an above- or below-average return in the next month.

Diversified portfolio
The eligible investment universe consists roughly of the 1,500 largest global equities in the developed markets. From this universe, a portfolio of around 100 stocks with the best expected risk/return ratio is created every month. The sector and regional weights are passively implemented, so that mainly stock-specific risks contribute to the alpha. At the time of a rebalancing, the weights of the underlyings deviate by a maximum of 1% from their weighting in the reference index, so that the risks are broadly diversified.

Responsible approach
The investment process is carried out according to the Responsible Standard of ZKB Asset Management and is based on 3 components:

1. Exclusion criteria: The exclusion criteria primarily eliminate manufacturers of weapons. Affected are business areas such as the development, production, storage and distribution of cluster munitions, anti-personnel mines and nuclear weapons.

2. Active climate strategy: with our Responsible products, we aim to achieve the annual CO2e reduction target of the Paris Agreement by decarbonizing the portfolio by 4 percent p.a., still taking annual nominal economic growth into account.

3. ESG integration: ESG criteria are an integral part of our active investment process, as we are convinced that they lead to more informed investment decisions. The portfolio profile therefore has a significantly more attractive ESG profile than the benchmark index. This way we reduce investments in companies with unconvincing ESG credentials.

Dynamic Tracker Certificate on AI Responsible World

• Broad diversification
• Open End
• Stock selection by AI Algorithm /ZKB Asset Management
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