Many fixed income investors rely on portfolio management firms, some of which in turn have integrated artificial intelligence tools in the municipal market but may not have considered the hidden costs.
Current AI capabilities allow portfolio managers to do more with less, and in time, some professionals believe AI will replace entry-level positions in the muni industry, which raises the question of how will the next generation of financial experts get experience.
"I don't know if it'll necessarily replace jobs yet, but I think we're close," DLR Search Managing Partner Brian Gallagher said. "Moving forward, I think we're going to see less hiring at the junior level."
AI integration for fixed-income portfolio management impacts research, automation of management processes and individual asset evaluation.
"It's helping standardize a lot of data and helping portfolio managers and research analysts build out internal credit databases and ways to look at credit," IMTC head of sales Blake Lynch said. "I think that is actually improving overall portfolio quality, because people now have research tools that they didn't have before in order to take in more information faster and really build up the quality of portfolios as a result of AI."
While AI has its merits, IMTC believes, it needs to be monitored.
"AI is still operating like a junior portfolio manager assistant, so definitely something that can help you make faster decisions," Lynch said. "While it's powerful and can help ingest a lot of data, it's really important to have guardrails and things in place to ensure good quality results."
The company relies on its own Optimizer — a proprietary decision support tool used to assist in investment decisions — rather than AI to pick bonds to buy and sell.
"Much of what delivers value today is really automation, not AI: rules and guardrails paired with clearly defined objectives, connectivity between systems that automates settlement, and live data brought into portfolio management decisions," IMTC said in a June report.
That said, IMTC still incorporates AI into its process.
"IMTC runs on deterministic rules logic, with AI enhancing the intelligence layer above it," according to the report. "IMTC treats AI as an accelerant rather than a threat: an AI layer without a platform underneath is a tool without a home."
AllianceBernstein believes AI enhances fixed-income managers' ability to employ systematic approaches. The tools empower managers in three distinct ways: helping them identify attractive and unattractive bonds through an objective ranking system, optimizing findings to create a portfolio and realizing that portfolio through informed implementation, according to a report from the firm.
"AI can create valuation scores at both the individual bond level and the issuer level, creating different lenses through which to identify bond-price anomalies," according to the report. "AI also brings a new dimension to the probability of default analysis, improving on rigid academic models."
BNP Paribas believes in the tool's ability to improve the "fundamental analysis of issuers and detect information that can potentially be used to generate alpha and distinguish the value amongst issuers," Chief Investment Officer Chris Iggo wrote in a report.
"For portfolio managers, more powerful research through AI and the ability to use the technology to isolate material pricing information will be beneficial to how risks and the liquidity profile of a fixed income portfolio are managed," Iggo wrote.
Given AI's contributions, some muni market participants worry it could eventually replace the entry-level positions used to train municipal analysts and portfolio managers.
Firms are starting to grapple with how to train the next generation of fixed-income professionals given AI's automation of entry-level positions. Pursuing and embracing efficiency by relying on AI may optimize performance, but it leaves the future uncertain.
"There are real positive externalities in terms of leveraging that technology to do our job better, but there are ongoing limitations," Allspring head of municipal fixed income Nick Venditti said. "How do you train that next generation if the machine can do all of the easy stuff?"
Venditti reminisced about the days when he had to do deep dives into school districts, sifting through mounds of paperwork and documentation in order to fully understand the market he was entering. From there, he slowly increased the stakes, working in more complex sectors. Now, that early incremental development position "has been taken by a robot."
"I think there's a huge problem, specifically in the municipal business, because the typical portfolio manager in this space is aging out of the market," IMTC's Lynch said. "People are starting to retire, and, if you don't have people to backfill that, I think there's going to be a huge talent gap."
Firms, aware of a more AI-focused future expect candidates to have knowledge of or a willingness to work with AI.
"I'm seeing a growing interest in candidates who are more technically sound, curious and adaptable," DLR's Gallagher said.
"When we're looking at some younger people that we're bringing in, they are really coming in as people who've leveraged AI from the beginning of their careers," Lynch said. "They're coming in with an entirely new knowledge set compared to some of our senior-level people."
