Now fund manager BlackRock turns to bots, but trackers still win for small investors

Regular readers may recall that I wrote last week about Goldman Sachs potentially using robots to provide financial advice. Fund manager BlackRock is, according to the New York Times, looking to do the same thing with its fund management.

The problem with actively managed funds that aim to beat the market is that they are expensive when compared to those that “track” the performance of a stock market index.

The latter charge annual fees of a fraction of a per cent to retail investors, even less to the likes of pension funds. Actively managed funds can cost as much as 1.5 per cent of our funds every year to you and me. They’re less pricey for organisations with a lot of money to invest, but still cost them many times what they pay for trackers.

Small wonder. The people employed by money managers to run funds and pick stocks command high salaries and require expensive infrastructure. Offices, Bloomberg terminals, secretaries, support staff, and the like They also like to be able to have the latest research, and to spend their valuable time visiting companies in which they invest.

Even when they do that, most of them struggle to beat the market over the long term, all the more so if you factor fund costs into performance data (and you should).

If a fund management company like BlackRock can cut out some of that cost, if it can dramatically reduce what it charges investors, it might help to stem the flow of funds away from actively managed funds. And BlackRock might still be able to make a better margin than it does from its trackers through the "value add". Saints be praised, we're saved!

If only it were that simple. For a start, there’s no guarantee that bots will work any better than the average stock picker. Actually, forget that. They probably will. Average stock pickers aren’t very good. Perhaps we should say there’s no guarantee that they’ll work any better than a half decent stock picker.

However, consider this, if you will. For a fund to be able to beat the market, it also requires that other investors under perform with tackers sitting in the middle.

If everyone goes with bots, you would have to assume that some will inevitably fail to cut it. A bot managed fund is also only good as its algorithm, or its AI.

But let's assume everyone irons the bugs out and AI driven funds learn to deal with the complexities and occasional panics the remaining humans like to indulge in, and that they all act in an ostensibly logical manner. They'll surely all end up trending towards the mean and become like, well, like trackers. But expensive ones. Either that or (more likely if you think about it) we might see some very odd things happening in the world's markets. It'll be anarchy I tell you! Anarchy!

It at least promises to make life as a financial journalist interesting, unless they start replacing us with bots too. But perhaps different bots will operate different strategies. Some will win. Some will lose. And what won’t change is this: For the small investor, and for many larger ones too, BlackRock’s trackers (the biggest part of its business) will make for the cheaper and the better option. Even when compared to BlackRock’s better bots.