Lockdown: the fourth industrial revolution on turbo boost

For most countries, the pattern was the same. The first case of coronavirus is reported; social distancing is introduced; not long after the entire country is in a hard lockdown, with only supermarkets, clinics and other essential services allowed to operate. Citizens privileged enough to continue earning an income from their homes, settle into the new work-from-home policy environment, have everything from groceries to luxuries delivered to their homes. It they hadn’t already done so, they set up wi-fi and/or increase their bandwidth, get comfortable with Zoom for work and social interactions, and set up virtual classrooms for their children. A day without a digital device has become unthinkable. And every online action carries value as a data point.

Already before the pandemic it felt as if the world had been changing at a breakneck pace. In one generation, since South Africa’s first democratic election, cellphones have replaced landlines, Google has revolutionised the way we access information, Facebook ‘news’ and ads upturned traditional media, and never before have our ‘likes’ and behaviour been tracked as thoroughly as today. Young children in 2020 cannot fathom the idea that people once needed to adjust the aerial on the television to get a blurry image on the screen or use the encyclopedia to do projects. Everything is now at their fingertips.

The speed of industrial revolution can be overwhelming, and it will impact every single sector. It’s vital that we are fully aware of how it could shape the investments industry in the years ahead.

Some background: the impact of the first three revolutions

Before the current revolution, there were three other industrial revolutions:

The first industrial revolution (1760-1840): The Industrial Revolution was characterised by mechanisation and the invention of the steam engine. As a result, industry started replacing agriculture as the backbone of the economy. Coal mining became pivotal and, together with steam engines to power trains, led to a rail network to accelerate economic growth. This is also the start of the large-scale division of labour in the workplace.

The second industrial revolution (1870-1914): This time period is also called the Technological Revolution. Massive technological advancements supported the emergence of new sources of energy, such as electricity, gas, and oil. This revolution is characterised by the creation of the internal combustion engine. It featured an increase in the demand for steel, chemical synthesis and methods of communication such as the telegraph and the telephone. Suddenly it was possible to communicate with someone on another continent on the same day. It is also during this period that the automobile and the plane were invented, revolutionising the way people and goods are transported. Entirely new industries emerged to invest in.

The third industrial revolution (1960-now): This is also known as the Digital Revolution. The third revolution gave us electronics, advanced telecommunications and computers. These technologies, in turn, enabled space expeditions and biotechnology. Again, a plethora of new types of businesses to invest in arose. And the way investors interacted with their investments and service providers shifted fundamentally.

The future now – the fourth industrial revolution

Professor Klaus Schwab, the founder and executive chairman of the World Economic Forum, recently published his book The Fourth Industrial Revolution on this new period we’re entering – the era of the unification of man and machine. Although it sounds like science fiction, all it means is the information that has been created in the Digital Revolution (third industrial revolution) and that continues to be created at an exponential rate can be used to make better decisions – in the way we live and also in business.

The promises of the fourth industrial revolution

The proponents of the new revolution argue that with enough data points and intimate knowledge of us as individuals, the fourth industrial revolution may allow us to prevent problems before they arise. Let’s take the Apple Watch or Fitbit as an example. Amongst other things, it collects data on our heart rates and the amount of exercise we’ve done. This makes it possible for these watches to alert users that their resting heart rate is too high and that they should consult a doctor. As a result, users become aware of a heart issue, for example. Apple has sold well over a billion iPhones. Very soon, Apple could go further and warn us about our likelihood to develop diabetes or certain cancers. Other than the obvious benefit to the users of these devices, this information would also aid insurers in pricing risks better.

Not only can the unification of man and machine prevent disaster on an individual and collective level, it can also allow humanity to effectively use vast amounts of information. Can we as humans do it? The human mind for all of its potential, has its limitations. We would not be here if we could not make quick decisions. However, we tend to make decisions that are “satisficing,” a combination of satisfy and suffice.  We tend to make sub-optimal decisions because we either don’t have access to all the information required, or our minds are unable to process the information quickly enough.

The reason we have managed to live so long as a species is because of our ability to make the satisficing decision, such as run and survive when we sense possible danger. However, to thrive in the new world, we need other systems, such as machine learning and artificial intelligence, to take full advantage of large amounts of data.

The perils of the fourth industrial revolution

For all its benefits, the new era is not without its dangers. More than ever government needs to play its role to regulate the privacy of data and ensure it’s not used to exploit unwitting users. Already, Facebook has been fined $5 billion by the Federal Trade Commission, the largest penalty ever imposed on a company for violating consumers’ privacy rights.

The fourth industrial revolution also holds the potential to increase the gap between those privileged enough to have access to expensive digital devices and those who cannot afford an entry-level smartphone. A further impact of the revolution, as with all the previous revolutions, would be job losses and certain careers becoming entirely obsolete as shopping and even meal-ordering moves online, and artificial intelligence and robotics advance.

The future of financial services and investing

The financial services industry promises to be positively impacted by the fourth industrial revolution, particularly businesses willing to do the hard yards to harness and analyse data, and adapt. In insurance, the abundance of information would lead to individual risks being priced more effectively, a result which is better for the insurer and the consumer.

In the investment industry, the possibilities are endless. For example, ‘fintech’ will give consultants a more intimate knowledge of their clients. Ticking boxes that ask for your tolerable level of risk and choosing default pension plans may soon be a thing of the past. The data available should automatically give asset managers a better understanding of clients’ financial standing, life-stage and their personal needs going forward.

Over the past two years Sanlam Investments has interacted with third-party asset managers who are exploring machine learning and artificial intelligence (AI) in their investment processes. Locally, adoption has been slow with a handful of managers only starting out with machine learning. But the technology allows these managers to clear up some of their blind spots and ask more questions.

Internationally, the use of algorithms in hedge fund strategies is nothing new. Top performing firms such as Renaissance Technologies, Bridgewater and DE Shaw have been using algorithms in their processes for at least the last 10 years; the inputs of course have largely been determined by humans, thereafter the trading occurs automatically. The track record of these managers speaks for themselves.

More recently, more traditional AI strategies (with far less to no human intervention) have been launched. In a Prequin survey, a collection of 152 AI hedge funds was found to have outperformed their all-strategies index by a cumulative 3% over three years. That being said, the Sharpe ratio of the AI Index was 1.96, whilst for the traditional hedge fund index it was 1.40.

For all their flaws, humans are wondrous. What has set us apart from every species known to have walked the earth, is our ability to build tools that allow us to operate beyond our existing limits. The fourth industrial revolution has already started and the reality is that much of the technology is already on our door step. The new era promises to be both challenging and one that holds nearly endless potential.