Understandable Artificial Intelligence

Overview

EDS was given 3 funds by a U.S. based endowment: IEMG and two active Emerging Markets

The goal: compare the funds head to head and decide which fund is better

EDS expanded the task and analyzed which fund should be added to a traditional 60-40 portfolio

IEMG vs Active EM Funds:

Return and Standard Deviation

Both active funds have higher Sharpe Ratios vs. IEMG
EM has a slight advantage

*Data from EDS, Prospecta Trust, & Bloomberg, courtesy of London Business School

Return and Total Factor Sensitivity

Both active funds seems better vs. IEMG
Developing Mkts has a slight advantage

*Data from EDS, Prospecta Trust, & Bloomberg, courtesy of London Business School

Which fund is better?

Analysis was done on a standalone basis

Both active funds appear better than the passive

EM Fund is better on St. Deviation

Developing Mkts Fund is better on Total Factor Sensitivity

Further Analysis

Anaylze total factor exposures for each fund

Compare funds with traditional U.S. 60/40 portfolio

IEMG Factor Risk Exposure

Highest exposure to:
- U.S. industrial production
- Chinese leading indicators
- U.S. market

*Data from EDS & Bloomberg, courtesy of London Business School

EM Fund Factor Risk Exposure

Directionally similar exposure compared to IEMG
- Higher Systemic Risk
- Lower exposure to U.S. market

*Data from EDS & Bloomberg, courtesy of London Business School

Developing Mkts Factor Risk Exposure

Similar exposure as IEMG

*Data from EDS & Bloomberg, courtesy of London Business School

Adding Funds To Existing Portfolio

Use default U.S. 60/40 with 8% target return portfolio

How much would each of the 3 funds add

Adding To Existing Portfolio

A.I. prefers Developing Mkts Fund:
- Lower fees vs. EM Fund (0.86% vs. 1.25%)
- Higher Total Factor Sensitivity

Should Either Be Picked?

We analyze entire Client universe

*Data from EDS, Prospecta Trust, & Bloomberg, courtesy of London Business School

Should Either Be Picked?

Driven by Chinese leading indicators
Each column represents a different fund

Should Either Be Picked?

High exposure to metals
Second only to dedicated gold & special minerals fund

Should Either Be Picked?

Extremely high exposure to U.S. industrial production

Should Either Be Picked?

EM Innovators Fund has the highest systemic risk of the 3

Should Either Be Picked?

All have negative exposure to U.S. consumer prices

Should Either Be Picked?

Negative exposure to U.S. retail sales

Conclusions

Funds need to be evaluated in a full portfolio context

Both active funds seem better than the passive one
Selection becomes harder between the 2 active funds:
- EM Fund has a higher Sharpe Ratio
- Developing Mkts Fund has a higher Total Factor Sensitivity
- Developing Mkts has lower fees
- Developing Mkts has lower Systemic Risk
All 3 funds could potentially be replicated/replaced

Disclaimers

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this presentation, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for an individual's portfolio.

Our projections are based on current market conditions which can vary over the coming months and weeks. Additionally, our projections are based on historical market behavior which may vary unexpectedly. Using Machine Learning, our tool should adjust to new market fluctuations but we might not be able to avoid short term volatility.

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