‘Those who use AI better can win over those who won’t’: HDFC AMC’s Navneet Munot

According to fresh market updates, For decades, fund managers have relied on information, analysis and judgment to make investment decisions. Artificial intelligence is now changing how each of these is applied. In a conversation at the Moneycontrol Mutual Fund Summit, Navneet Munot, managing director and chief executive officer of HDFC Asset Management Firm, discussed how AI could augment fund managers, why behavioural edge could become more important and why asset managers still need to develop young investment talent.

For decades, the fund manager's edge was built around three things: the information edge, the analysis edge and the final judgment or behavioural edge. All three seem to be getting disrupted by AI. How do you see the role of fund managers change as AI becomes a reality?

You stated that this will be challenged by AI. I would say this will be augmented by AI. Information edge, analytical edge and behavioural edge can be augmented. As a fund manager, we have noted the transition from trunks of papers and sheets to ticker tape, to terminal, now to a transformer. The ability of this to process information, to collect information, to give you insight, is absolutely unprecedented.

Of all the previous transformations, this is like the mother of all, no doubt around it. This is like intelligence where it is getting magnified and improving every day, every second. I've been a big believer that this is one of the biggest transformations that humanity has noted. It is as big as the Industrial Revolution, if not bigger, and with a wider impact.

AI can magnify the way you process information, develop your macro thesis and do scenario analysis. On idea generation, whether it is hundreds of emails in your inbox from sell-side market watchers, your own market watchers or other data points, the way it can process information, to portfolio construction, scenario analysis, stress testing, simulation and back-testing, all of that can be done much faster, with more speed, insights and personalisation. Of course, lots of mundane jobs can additionally get automated.

The most precious thing that we have in the organisation is the number of minutes or hours that a fund manager, market observer or dealer has got, and I think AI helps you make the best of it.

You touched on information edge, analytical edge and behavioural edge. Why will the behavioural edge stay important?

I keep thinking that the difference between an AI agent and a human being would be that what you do as a fund manager, and what I've been doing in my previous life as a large part of my career, is using information to create insight which ultimately leads to an outcome to win the trust of the investor.

I think the first two parts, getting the information and analysing it to draw insights, can be augmented tremendously. But I think the next part of creating that outcome to win the trust of the investor, that part I think human beings will be a lot more important going forward than what they have been.

A lot of people are saying that we will trimmed down on market watchers because we don't need so many people to process data. You need fewer dealers because a lot of automation can be done.

An AI agent can work 24 by 7. It doesn't need a tea break or a smoking break. But it won't lose its sleep because it's working overtime. I'm worried because it won't lose sleep when an investor is losing money. That character part, that conviction part, is what I think will keep fund managers very, very relevant.

But AI can process enormous amounts of historical data and identify patterns. What could it miss?

The world is so complex. Newton famously stated that he could predict the motion of heavenly bodies but could not predict the mania of the mob in the market.

With more information at your fingertips to millions of people, because it is going to be so pervasive, so accessible, so affordable, it is only going to create more noise.

I believe in the adaptive market hypothesis. The market is like a collection of individuals expressing their views every second. The ticker tape contains lots of information, lots of emotion in it.

A machine will look at historical data and create patterns, surely better than what we do on an Excel sheet or any application today. It can have simulations and, because of machine learning, the machine itself is learning. But there will always be a scenario which will be very difficult for the machine to predict.

Everything that AI is doing is mostly based on the data or information that it has got. In the last four or five years, the amount of data and information that we have put in the public domain through the internet is more than what we have done in the previous hundreds of years or the entire humanity.

With that, a lot of biases will inherently come into it. Because Western markets are so big and the current trend is so big, it will have inherent bias. Just like human beings have bias, machines will additionally have their bias.

I think having that contrarian thinking won't come easily to the machine.

So will AI eventually replace fund managers?

My firm view as of now is that I think the behavioural edge will actually get sharper and more powerful going forward.

I'm looking forward to how much more the machine can help. I have a battery of engineers working in the best possible manner. Of course, security is a big concern.

You have to ensure that you are not transferring your talent, your brain, your in-house wisdom to somebody sitting in the US. In Amazon Bedrock, with a lot of guardrails and a sandboxed environment, we are working on many things. I want to really flourish and see how it can add value.

Whether fund managers will lose their jobs, I think those who use AI better can win over the ones who won't use it. But whether they will get completely replaced, I have my doubts.

The mutual fund industry is growing rapidly, but assets are growing faster than the number of experienced fund managers. How can outcomes be different if newer managers have less experience?

The concept of mean, or the statistical concept of mean or average, is one of the best or worst inventions.

We have a MidCap fund which is into its 20th year. It is the same fund manager from day one and today. But you know that that's not true of the industry.

The debate is whether AI will replace fund managers and whether we'll have these models managing money for market participants. My answer is no.

I'm a big believer in active management. We have 50 products on the passive side, maybe another NFO might be going on at present. But I'm a big believer in active management simply because I think the behavioural edge is only increasing and there will be bigger opportunity with more information getting democratised.

It's not going to reduce the opportunity. It's actually going to gain the opportunity.

I keep hearing, both in India and globally in the asset management industry, that now we don't have to have as many market watchers or associates. I keep thinking that if I don't hire an associate or an market observer today, how will I create that fund manager who has a deep sense of purpose, a deep sense of trusteeship, and has this contrarian thinking, this character and conviction 20 years later?

All of this doesn't come from just working on your models. It comes from seeing people, seeing the environment and learning from your elders in the firm. That culture is very important to build the investment team and it's not going to go away.

Anybody who's thinking that I won't hire the juniors or I will reduce the number of people, that firm will have trouble 20 years later.

So does that mean the industry will need more market watchers even if it does not need proportionately more fund managers?

That's the beauty of our business. I talked around our MidCap fund. That fund manager managed a Rs 100 crore fund and is managing a Rs 1 lakh crore fund. You don't need seven people to manage that fund.

But you need more market watchers because the overall universe, which would have been 100 firms when it started, now is running into around 500 firms at our end. And this is going to gain.

India will be one of the largest IPO markets for the next 10 years. So there will be more firms and more ability to analyse.