The Daily Telegraph - Your Money - - YOUR MONEY - Richard Dyson

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

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