And so the idea of the Turing test is for someoneposing question, can you actually differentiateor know that depending on the answers that you get,whether you're dealing with a computeror with a human being.David, it's always great to have a conversation with you.So thanks so much for stopping by.Well, thank you for inviting me again.So if you don't mind I'd love to start with the topic of AIvery much in the news right now Now I think a little unknownfact about you is that you started or you will issuea working on AI in the 90s Is that right?That's right.I studied artificial intelligencein the 90s at the very University in Amsterdam Whichat that time was a relatively unknown term when I said AIpeople look a bit funny Well, what is it about and Itry to explain well, it's a mixture of mathand and perhaps logic and psychologyBut of course nowadays AI, you can't escape.You see it everywhere, in the news, in every sector,it's playing an important role.So what were the thoughts even back then?Was there always this idea that this would be a huge forcefor good in the world?Or were there even reservations back then that we didn't knowwhether AI would take on this own life of itself or whateverdangers there might be?I think the AI, I used to say, when did AI actually start,meaning different people have a different view on what AIstarted, but you could trace the originsof AI to the Second World War, when the bright peoplein Bletchley Park try to...Alan Turing?Sorry?Alan Turing?Absolutely, Alan Turing, indeed, with a group of very bright menand women tried to decipher the encryptedcodes from Nazi Germany and effectivelycombine the wisdom of linguists, mathematicians, psychologists,and tried to find a way to crack codes.And so in one way, AI was born trying to figure outhow can we use also computers, computers were kind of born thenat the time to decipher very complicated problems and do thatrelatively quickly.Of course, there was enormous senseof urgency to do so at the time.Of course, the nature now is a bitdifferent to what we're talking about now, but the idea of usingcomputer power to solve problems very rapidly and also sometimesuse human type thinking.So heuristics, rules of thumbs is definitely what is behind AInowadays.Do you have a particular view on ChatGBT,how useful it's going to be, how it's going to be used?Well, I'm experimenting with it myself.I mean, I'm playing with it, trying to understand.I'm very impressed.I mean, if you think about the speed with which you can getan answer is incredible.And coming back to Alan Turing, there is somethingcalled the Turing test.The Turing test is about, can a computermimic human behavior and use it as a metric to decide whethera computer is as intelligent as a human being.So how does the Turing test work?Imagine you have a room or two rooms effectively.In one room is someone who's posing a questionand in the other room is either a human beinganswering those questions or a computerbut you don't know.And so the idea of the Turing test is for someoneposing a question can you actually differentiateor know that depending on the answers that youget whether you're dealing with a computeror with a human being.Now with CHED GPT is becoming very difficult.I mean, I mean, you know it's a computerbecause it's incredibly fast.No human being will compose the answer.But the quality of answers, although in certain casesthey're nonsensical, is incredible.So the language, especially the way it's beenarticulated, is incredibly impressive.The more media I've been reading recently, the more terrified Igot of the idea that this AI could take on a life of itself.You know, the dawn of the robots could come and we should be verynervous.But speaking with some other AI experts more recently, itseems that it seems very much contained.Where do you sit in that spectrum of feelingthat the dawn of AI is just a complete positive on marketsand on society to being something that we need to benervous about?I think even among the AI expertsthere are different views.Those are very concerned about it.I mean there's very recently about a thousand expertswrote a letter in which they expressed concern about AI,including people like Elon Musk and professors.I do think that actually the whole development of CHEDGPT and other AI technology begs the question,more fundamental questions about who we actuallyare as human beings.I mean, if you can see how these technology develop,the difference between how we think as humans and how weunderstand machines to be, it is, I think, verydifficult sometimes to really distinguish the intelligenceof CHED GPT or other systems, and can we call thatintelligence?And especially in these deep learning systems.And I think there's really the philosophical question,who we are as human beings is really now at the forefrontand it's being forced by this technology.Whether we should fear it or not, I don't know.I think it's definitely a reason to think and ask some veryimportant philosophical and I would say also ethical questionsabout where these developments can go to.Some other experts I've been speaking to seem adamant aboutthe fact that AI will be an enhancement to mostpeople's jobs by 10 to 20%, let's say.And then there are others who fear that it's goingto replace a huge amount of jobs.I mean, maybe with reference to FTSE Russell where you work,but how do you see it playing into the labor market,for example?To be precise, it's a very difficult question to answer.I think it's probably a bit of both.So where technology on one hand will be complementary to whatwe're doing, so we'll make processesmore efficient, be faster, hopefully even reducingcertain errors.And this is your general what I'm talking about.But it's probably also true that it will replacecertain type of jobs, as we've seen that automationhas done so over the last hundredsof years.So I think we need to see also what's the impact of automationon processes and how businesses are organized.And how about as it relates to Tootsie Russell,are you already trying to incorporate AI into what youdo?We have run an AI impact assessment.So what we're trying to do is where do we use AI,how do we use AI.We also try to understand also the AI regulation.So there's a bit of development there.This year the EU has come out, so the AI act, the EU AI act.There's other legislation that we're trying to understandthe scope of and how that impacts our business.I would say, Fuji Russell itself,we're dealing with companies, right?So less about individual personaldata.What is important in our world, of course, is that our datais accurate.So although I love JetGPT, We also know that itcan generate nonsensical answers.Our business is all about accuracy, validationof data.So although we can kind of observe what is happening,it's not something that we use.Don't use CHED GPT to generate indices that needs to be runaccording to a very strict process.We can audit it.The answers need to be 100% reliable.So much of your business is about creating these indicesand deciding, or should I say buildingbenchmarks to see which companiesget into the index and which don't.Can you talk a bit about those kind of conversationsthat you're having now with companies,who you're talking to when it comes to designing these indicesand what kind of criteria that people need to pass to getinto these indices?With relation to AI or just in general?Well, I was gonna start with more in general and thentalk about whether you could do an AI indices and what indexand how that would look.Well, the criteria that we use for companies are publishedon our website, we call them the ground rules,and we spoke about the analogy of the recipe book.And so in that sense, what it takes for a companyto be included in index is typically thingssuch as maybe the market capitalization.If you think about index like the FTSE 100,there we are looking at the largest 100 companiesbased on the market capitalization.That's effectively the market price times the stockthat's outstanding of all the companiesthat have a premium listing on the London Stock Exchange.So those are the criteria and then there's someother criteria such as free float.But big picture based on those criteria companies are eitherin or out of the index.We do that for the FTSE 100 but we also do thatfor more than I said last year 1 million.We have now 1.4 million roughly in the indicesthat we have effectively recipe for.We were talking earlier when you talked about countryclassification, can you talk a bit about that?So Futsi Russell has a so-called countryclassification framework, so every company gets assigneda nationality and that nationality gets associatedwith a particular market.Now depending on what market a company falls into, itaffects the index eligibility.For equities we We have four different markets,we have developed markets, advanced emerging,secondary emerging and frontier markets.Now depending on in which of those four buckets you fall,you will have a certain type of membership.Of course, the membership impacts also the type of flow.So if you are a frontier market, you have a certain amountof flow.If you're in a developed market, you have probably morefollowers.So the idea being of a lot of markets,they want to get promoted to the developed market statusbecause that is most likely leading to more flowsinto that particular market.Now what is it that we're looking at?For us we try to assess the accessibilityfor international investors to a particular market.So we try to understand what's the regulatory framework,how are for example minority shareholderstreated in a particular market.We try to understand how the effects market works,is it a well-functioning effects market, how does the equitymarket itself work and think aboutthings such as transaction costs,are they reasonable, are there no punitive tax costs involved.We also look at things like clearing settlementand we use a so-called quality of market matrix to assessand score a particular market.And we do that by actually engaging with stock exchanges.So we talk to stock exchanges, we talk to sometimes alsoministries of finance or treasury departmentsand say these are the conditions thatare conducive for international investors.So if you meet these type of criteria,you're more likely to get promoted to a marketwhere you'll get more flow.So this is a lot of engagement with various stock exchangesacross the world.And how about on a topic, let's just say like ESG,and there's a company that would like to be consideredan ESG stock, they feel that theymeet the criteria, how would they go about sortof lobbying you or trying to persuade you that theydeserve to be in it and how do those conversations go?Well, it's an interesting choice of words, so it's not a matterof deserving, it's either theymeet the criteria or they don't.So we try to avoid exercising subjective and discretionaryjudgment, but rather what we can do isexplain to a company these are all the criteriathat they have to meet.For example, a certain percentageof their revenues need to come fromgreen revenues, for example.Exactly.And then there's also how green revenues define what typeof activity.So again, we have a document that explains that,and based on indeed the data coming from the company,they either meet those criteria or not.What sometimes happens is companies come to us and ask,well, we think we met a criteria,but what happened?Well, we're not in the index, and of course,we then try and explain where they're falling short fora special footsie for good indexes is the longestrunning index that we have is more than 20 yearsthat we've been engaging with companiestrying to explain these are the type of thingsthat are important to get a better score.And there we have a criteria of having an ESG scoreof at least 3.3.The score goes between 0 and 5, but if they're above 3.3,they're in the index.If they're not, they're out of the index.But so companies are trying to understand what does it mean?How do I get to a higher score?What are the factors that contribute to a higher score?What are the factors that will detract themfrom the scoring?I can't remember if we talked about this last time,but I feel that from the period of about 2010 to 2020,there was a huge pickup in passive investing,driven a lot by new indices that were coming to the market.How do you feel the world of passive investing is going?Do you think that the rise in passive investingwill continue, or it's now time for active investing to comeback into the limelight?I think there will always be a market for bothactive and passive investing.It ultimately comes down to what investorsfeel there's good value for them.I would say definitely the growth in passive investmentis also about cost, right?There's passive funds, ETFs have become much,much cheaper over the years.So that's been one of the driving effectsof the growth of the passive market.But you know, I know you were in an active manager yourself,so have I been.And I think there will always be a marketfor active investors.But ultimately, it's the end consumer needs to decide whatoffers value for him or her basedon their own criteria, on their own risk appetite,and of course, on their own budget.That is what they'll have to consider.David, just before we finish up, this has beena great conversation.Thank you so much.Just what are the kind of things that come into your mind as welook out into 2024, 2025?Any big thematics that investors should be thinkingabout considering when thinking about sort of portfolioconstruction?I think there's still continuationof geopolitical risk.I don't think that's going away anytime soon.So I think that will probably be a big driver for a lotof investors.Including the role that China is going to play in the world.China is going to play.We're still dealing with the tension in Russiaand Ukraine.I don't think that's going away any time soon, unfortunately.So geopolitical risk is we have elections in many regionsacross the world, US, of course, very important.So geopolitics is going to play a big role.Energy, of course, is still playing a role.Inflation, I think, is a big theme.Central bank policy, we've seen higher,you know, higher rates, and with that come all kindsof questions around how you construct a diversifiedportfolio, 60-40, how does that workin this environment, how would we think about correlationbetween equities and fixed income,what is the liquidity premium that investorsshould get in this type of environment,so lots of challenges I would say over the next 12months, it certainly won't be boring.Well, if there's one thing about markets,it's that it's never boring, and neither are you David,so thank you so much for your conversation,this was great.That's very kind.Thank you, Chaimie.I hope you enjoyed it.
