AI is not only an important thematic investment but is also extensively used by J.P. Morgan Asset Management to identify new investment opportunities, explains Katherine Magee in an exclusive interview with finews.asia This reflects a dynamic combination of AI and human abilities.
Katherine Magee, what are the most important trends you are currently observing that are impacting the investment strategy?
One of our primary strategies focuses on the topic of climate change. Seeing as about 80 percent of greenhouse gas emissions come from energy in industry, agriculture, and transportation, our starting point was to identify potential investment ideas and solutions to these challenges. Thus, an important topic is the investment in the energy transition.
What does this mean exactly?
In the previous year, according to the International Energy Agency, the world invested more than $1.7 trillion in clean energy. Therefore, we see opportunities not only in companies focusing on renewable energy but also in the entire infrastructure supporting this transition, such for example the support of electric grids. Generally, energy efficiency more broadly is an important subject.
Thematic funds had a difficult year in 2023. Will they have a comeback in 2024?
From a client perspective, we saw less focus on thematic investments in 2023. This is partly due to an interest in traditional core strategies and the benefits gained from the growth and strength of the broader equity market. I don’t believe thematic investing has gone away but is simply playing a different role in the portfolios of clients.
In your opinion, which thematic investing topics are popular and unpopular currently?
At J.P. Morgan Asset Management we divide thematic investing into three main categories. The first category is disruptive technologies, such as AI, cybersecurity, and robotics. Unsurprisingly this area had a relatively strong performance year, and we believe interest will remain.
The second category is people and demographics, which deal with more social-oriented themes such as healthcare. This category was slightly more muted in 2023 but is certainly top-of-mind in the long-term.
And what is the last category?
Lastly, environmental themes, such as the energy transition and biodiversity, form a category. These portfolios were a bit varied. On the one hand, some of the narrower themes, such as companies focusing on renewable energy had a difficult performance year, but also because it is compared to a very strong performance year in 2022. On the other hand, certain companies innovating in technologies to support environmental themes performed quite well.
Financial stocks had a successful year on the stock exchange in 2023. How useful are financial stocks in thematic funds currently?
We do hold financials in many of our thematic portfolios. For instance, we hold them in our carbon transition portfolio, in which we are looking for companies across all sectors that are transitioning their business. Furthermore, we also see financial companies held in more social-oriented portfolios, for example when banks are potentially providing lending to underserved areas of the market or populations.
Climate change is one of the most pressing issues worldwide and you are already actively managing a climate change solutions fund. How do you further incorporate risks associated to climate change into your investment strategy?
In some strategies, we lean into innovative companies that are providing solutions to this challenge, such as renewable energy and energy-efficient heating and ventilation systems. Furthermore, we also have portfolios where the broad transition to a lower carbon world is the central theme.
How does that work?
We’ve brought together inputs from the sustainable investing team, as well as thoughts from our quantitative solutions group to develop an overall framework to evaluate the carbon transition readiness of companies. Therefore, we have a broad and holistic view on both the risks and opportunities that are presented to companies across all sectors when it comes to climate change, which we then use to build portfolios of clients.
How do you approach risk diversification in your investment strategy such as, for example, in your carbon transition strategy?
Our carbon transition strategy tracks risk metrics very closely relative to a broad benchmark. Hence, we keep regions and sectors in line with a traditional index and then we want to slightly overweight companies with the best carbon transition scores and underweight companies with weaker scores. Thus, we have a very risk-managed approach to portfolio construction that gives clients what looks and feels like a traditional benchmark but also reduces their carbon footprint.
And what other measures do you take?
Moreover, we have a very robust process within J.P. Morgan Asset Management which includes regular reviews with our independent risk teams and investment directors who are stress testing these portfolios to ensure they are delivering the expected outcomes of our clients.
And lastly, how do you integrate artificial intelligence into your investment strategy?
Artificial intelligence has been utilized for managing thematic portfolios since 2019. Furthermore, we have even developed a «themebot», which is based on machine-learning and uses natural language processing.
How does this «themebot» work?
Through the «themebot» our portfolio managers can type in a theme, and it will develop a list of related words and terms. Followingly, it will scan through millions of documents to try to identify how much companies are talking about this specific theme in their earnings transcripts and records. Moreover, it can scan how much revenue is generated by the company in relation to this specific theme.
What do you do with this information then?
We can partner with our team of more than 90 fundamental research analysts to analyze this potential list identified by the «themebot» and choose the companies that are most aligned but also the best investment opportunities. I believe this combines the power of artificial intelligence with the power of bottom-up fundamental human insights.
Katherine Magee is an executive director and works as an Investment Specialist in the Asset Management Solutions business at J.P. Morgan Asset Management (JPMAM). Beforehand, she worked in various positions at JPMAM, such as an Associate in Multi-Asset Solutions and as an Institutional Sales Analyst. Magee obtained her Bachelor of Arts in Economics at Northwestern University and is a CFA Chart holder.
