FOR STOCK PICKERS, IT’S MAN VS. MACHINE
It used to bemore art than science. Now, computers can do it cheaper, faster, better
Wall Street’s shift from man to machine is moving deeper into the realm of stock picking, a profession once viewed as more art than science.
But powerful computers that can crunch data cheaper and faster than humans can are spurring the nation’s biggest money- management firm to rely more on machines to help pick winning stocks and build more profitable portfolios. And all at a price investors won’t balk at.
It is the latest salvo in the war between “actively managed” funds, or those run by portfolio managers who use their own brains, investment strategy and company analysis to decide which shares to buy or sell, and “passive” funds that simply mimic the performance of a stock index or base buy- and- sell decisions on computer algorithms.
The evolution of funds goes like this: First there was the star mutual fund manager. Then came index funds whose goal was to match the returns of such indexes as the Standard & Poor’s 500. Next came ETFs, or funds that trade like stocks.
The latest shift in the cost- conscious, performance- driven moneymanagement industry is a move to place more stock picking responsibility on computers. BlackRock, the world’s biggest money manager with $ 5.1 billion in assets under management, said recently it would make changes to its actively- managed fund business. They include the launch of nine funds giving investors access to a team of investment pros that incorporates big data analysis and computer algorithms into its stock selection process— and with lower fees.
Mark Wiseman, global head of active equities at BlackRock, said the company is “harnessing the power of ‘ human and machine.’ ” The changes will result in roughly $ 30 million a year in annualized savings to clients, the firm said. The decision is due to two trends, says Dan Culloton, director of equity manager research at Morningstar.
“It’s cost and performance,” he says. Fees for managed funds are higher than those of index funds and ETFs. The average annual expense ratio for actively managed funds is 1.2%, Morningstar says, more than double the average 0.51% expense ratio for passive funds that track the S& P 500 and more than the 0.09% charged for Schwab’s S& P 500 index fund and the SPDR S& P 500 ETF.
Higher fees bite into long- term returns. A $ 100,000 investment with a 4% annual rate of return and an ongoing fee of 0.25% would be worth nearly $ 210,000 in 20 years, according to the Securities and Exchange Commission’s Office of Investor Education and Advocacy. By contrast, if the investor paid 1% each year in fees, the portfolio would be worth about $ 180,000, or $ 30,000 less, two decades later.
Returns from funds run by stock pickers have lagged the benchmark indexes for years. Nearly 70% of mutual fund managers that run U. S. equity funds did not beat their benchmark in the past year. That number rises to more than 83% in the past five years, Morningstar data show. BlackRock has had difficulty. “They’ve long struggled to build a competitive lineup of equity funds,” Culloton says.