An AI-powered fund manager that's beaten the market is ignoring a rebound in cyclical stocks

The exchange-traded fund is heavily weighted in health care and technology but underweight in financials and industrials

Robotic hand using a laptop computer, illustration. Getty Images
Powered by automated translation

An artificial intelligence fund that has almost doubled the performance of the S&P 500 Index this year isn’t buying into bets on a rebound in cyclical stocks.

The AI Powered Equity ETF, an exchange-traded fund driven by artificial intelligence, has risen about 13 per cent year-to-date versus a 7 per cent gain in the S&P 500.

The fund’s “manager”, a model which runs 24/7 on IBM's Watson platform, is heavily overweight health care and consumer discretionary shares, according to data compiled by Bloomberg. It has a modest overweight in technology and is underweight financials and industrials.

“However the algorithm is picking stocks it is delivering decent returns, albeit with some air pockets along the way,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note on Tuesday. “It isn’t buying the reopening/cyclical trade as we start the final quarter of 2020”, but at the same time, “it is not running to hide in Big Tech”.

The quantitative model behind the $96 million fund, developed by EquBot, assesses more than 6,000 US publicly-traded companies each day. It scrapes millions of regulatory filings, news stories, management profiles, sentiment gauges, financial models, valuations and bits of market data, and then chooses about 30 to 70 stocks for the fund, which is run by ETF Managers Group.

Launched in October 2017, the AI Powered fund has gained 27 per cent since inception, compared with a 34 per cent rise in the S&P 500.

“We read its message as ‘tech will work, just not the go-to names from earlier this year, and be very careful with cyclicals,” Mr Colas said. “We’re more optimistic than that, but looking at the AIEQ portfolio is a good reality check nonetheless.”