Why I don’t fully embrace this bright new world of mechanised investing
There will always be – or at least there always ought to be – room in the world for human investors who make decisions that in part stem from human characteristics of emotion, instinct or hunch.
I am not one of those who believe that investing will be better, safer and cheaper if it is undertaken entirely by machine.
That said, investing is changing dramatically, and it is definitely going the way of the robot.
In future more of the funds and other investing services we buy will be delivered without the intervention of humans.
Our risk tolerance, for example, will be assessed by robots. It will be matched against the information we provide about our investment objectives and wealth. And then a more or less personalised portfolio will be generated by a program and managed, over time, according to the information stored about us or provided by us.
There is also no end to the complexity and finesse with which algorithm-driven computer models can select stocks, and hardly a limit to how much information they can process as part of that function. For a human stock-picker to argue that he or she has an edge over the (much quicker and cheaper) machine will become harder.
These computer-driven sorts of services are already widely available and are growing in popularity.
Over the next decade (or sooner, according to some analysts) those models will become the norm for a majority of investors. They will also fall in cost. It has even been suggested that some computer-driven funds could be entirely free (see Page 4).
S&P Dow Jones, which compiles stock market indices, published a report suggesting that the cost of “passive” or “tracker” funds – where the underlying shares are bought and sold by a program so as to mirror the make-up of an index such as the FTSE 100 – could fall to zero. Why, and how? Firstly, these tracker funds are “commoditised” and compete on little except price. One fund that accurately tracks the FTSE 100 is just like another.
The difference is that if one of these tracker funds becomes big, it will benefit from economies of scale and cut its price, attracting more money, and so on, with gigantic, ultra-lowcost funds emerging. This is already starting to happen. The money that is moving into tracker-type funds is partly new money, but it is also money that is coming out of “active” or humanmanaged funds, which are far costlier.
One major global consulting group expects growth in traditional “actively managed” funds under management to be zero between now and 2020, while “passives” will grow by more than 10pc a year.
Ordinary investors – including me and millions like me, focusing on our pensions and Isas – are also part of the trend, with most big brokers reporting a steady increase in the
On track: funds that mirror stock market indices are excellent, low- cost vehicles – but not in every scenario