Index Funds Set to Benefit From Open Ai Price Efficiencies

“Open AI could take the investment world closer to the theoretical level of price efficiency across financial markets,” says Nico Katzke, Head of Portfolio Solutions at Satrix Investments.

Cape Town, Thursday, 8 June: The emergence of open access to artificial intelligence (Open AI) platforms like ChatGPT has the potential for changing and disrupting many industries and facets of our daily lives. The financial sector is no different. Its impact will become clearer as the technology matures, but it does seem that index trackers (or rules-based investment portfolios) are also set to benefit.

“Open AI could take the investment world closer to the theoretical level of price efficiency across financial markets,” says Nico Katzke, Head of Portfolio Solutions at Satrix Investments. The premise for the Efficient Market Hypothesis (EMH) is that new information is almost instantly reflected in prices. 

Price efficiency 

“Market efficiency, even in its most extreme form, does not mean trade would cease or there would be no profitable opportunities. Differing liquidity needs and risk preferences mean opportunities exist even if a market is fully efficient – it just would not offer up easy arbitrage opportunities. In a world where open AI matures and makes vast quantities of information instantly and easily accessible – and market prices reflect that – active managers may come up against significant pricing and performance pressure. With more efficient prices, the case for using indexation by financial advisers, investors and portfolio managers alike becomes stronger.”

It is too soon to say how disruptive Open AI will prove to be. At this early stage, investment professionals agree that the technology will not be a silver bullet for financial instrument selection and /or portfolio diversification. “The impact of Open AI on investing might be comparatively muted early on because, although the technology is incredibly powerful, you need to ask the right questions to coax out an appropriate answer,” Katzke says, offering the tried-and-tested ‘garbage in, garbage out’ disclaimer. Open AI is further constrained by inconsistencies in the data it has access to.

Active management and Open AI

It also does not spell the beginning of the end for active management. At present, the trick to maximising the use of Open AI in finance hinges on human and machine collaborations that recognise their respective strengths: humans are creative and innovative whereas machines are excellent imitators and information collators. Katzke uses a ‘chess versus poker’ analogy to illustrate the concept. Humans cannot compete with machines when it comes to games like chess, where all the pieces are on the table and the rules are fixed, but rather excel in games of chance and nuance, like poker.

“With chess, machines can use brute force algorithms to beat humans every time; in an unstructured environment, such as with poker, humans have an edge,” he says. “This is not due to a lack of computing power or ‘access to information’ limitations but rather because the complexity in such unstructured environments becomes infinite. Likewise, asset management is ‘played’ in an environment where each action affects the outcome. Thus, while prices will likely become more and more efficient (like a computer making all the right moves in poker from a statistical perspective) – those able to correctly read the mood and make a seemingly sub-optimal move in the short term will be well rewarded. Proving the ability to do so consistently is going to be the main challenge for active managers. The broad underperformance of active managers to simple, cost-effective and efficient index alternatives is a persistent feature likely to only accelerate further into the future as technology advances further.”

Not a silver bullet

Early adopters of Open AI platforms like Chat GPT are wondering if the technology will give them an edge in picking shares, and perhaps even replace their financial advisers. But those who reckon they will get rich quick by asking Chat GPT for the next ‘hot’ share are going to be disappointed. The reason is that Open AI will go off in search of an answer without considering a range of vital contextual inputs including the investor’s product preference; risk appetite; timeframe etc. “Open AI is not going to be a silver bullet for investors and even if it were able to predict which companies will most likely outperform, this publicly available information will be used by asset managers to remove any price arbitrage,” Katzke says.

Fears that financial advisers may have about Open AI replacing them can be explained away with an anecdote about plumbers and YouTube. “Three decades ago, if you had told a plumber that his or her clients would one day be able to get a full step-by-step video explainer of every aspect of the job, he or she might have downed tools immediately. Today plumbers are as in demand as ever, despite the myriad technology advances and available access to information,” says Katzke. 

The expectation is that Open AI will change the advice landscape without eroding the need for financial advice and financial advisers. “Financial advisers will leverage this technology to become more efficient at what they do; an adviser might use Open AI as a guiding tool in the same way they currently use an excel spreadsheet or advice software,” Katzke says. 

Investors, meanwhile, will benefit from the research capabilities that Open AI unlocks, using the technology to learn more about companies and company financial statements. “Open AI is a fantastic tool to broaden investors’ understanding of financial markets, and to the extent that knowledge improves investment outcome it will be beneficial in the lay investor’s hands. It will, likely, be a great demystifying tool, but in the same way that access to google has not made us all astrophysics experts – improved access to information does not equate to mastery,” he says.

Open AI will bring unique benefits to different sectors of the investment industry. “At Satrix, our business is built on disseminating, understanding and using information efficiently; improved access to a deeper set of information will only serve to improve our business model,” concludes Katzke. “And of course, the more efficient financial markets become, which is one possible consequence of the wide adoption of open AI, the better it is for index trackers and the investor community alike.”


Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.

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