Are stock pickers a dying breed?

By James Terry on Monday, 19 June 2017

The clichés of active fund managers are well known; juicy margins fees for managing a portfolio which just about outperforms (or in some cases, fails to) the index. But the rise of AI and machine learning could force them to work that much harder for their management fee.

Technological innovation in financial services is nothing new, whether it be the growth of online execution platforms, robo-advice or the billions of pounds currently being invested in fintech start-ups. The fund management sector is also no stranger to tech, across front, mid and back office functions. Perhaps one of the most well-known examples of technology in the sector are passive funds. Pitted against their actively managed siblings, passive funds, be they index trackers, ETFs or another vehicle, are a way of delivering cost efficient beta and will likely be included in most investor’s portfolios, no matter their investment objective.

In a time of growing pressure on the fees actively managed funds charge, a general sense of investors falling out of love with active funds, plus a desire for an investment process with a greater rigour, technology has found a new application in the space, but in the active world. Active quantitative fund management sees computers make investment decisions, where humans would have done so historically. This is not a case of rebalancing a portfolio to represent a change in an index as in a FTSE100 tracker for example, but investment decisions made by AI based on market events and pre-defined algorithms. And with little human involvement, they can deliver the desired alpha but at costs typically associated with passive funds.

This isn’t saying that the days of human stock pickers are numbered, but those that remain will face increased pressure if the machines (out) deliver the returns their flesh and blood counterparts offer, and at a much lower price. What’s more, the machines never need a holiday.

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