Stock pickers vs robots

Most people manage to hide from their own failure, so pity the poor fund manager, whose every wild blast is measured in unforgiving performance numbers. Between 70 and 80 per cent of fund managers have underperformed a passive index over the past five years, a ratio known as the slaughtered three quarters.

Fund managers are exposed by two things — their performance is quantified on a daily basis and there is a non-human alternative to compare them against. This is not the case with a politician or a policeman. Computers are getting better than us at an awful lot of things; the choice between human or computerised investment has implications well beyond the financial profession.

But before we write active managers off entirely, what about the successful 20 per cent? When searching for a good active manager you need to know the types of creature you’re dealing with. First up, the closet indexers, who deliver performance that is suspiciously similar to the index but charge higher fees, thus ensuring mild but continual disappointment. These are a con — a supposedly active fund that really is no such thing. Closet indexers are either clueless investors running with the herd or, more sinisterly, competent investors who have got too greedy. If they’re running too much money in their fund, it is hard for them to buy any but the largest stocks, thus achieving returns that are little different from the blue-chip-dominated indices.

Next up, the asset allocators. These are ‘top down’ investors who get their ideas from changes in macroeconomic conditions. The choice of stock is secondary: their thinking is driven by views on a country’s economy, a central bank policy or an industrial sector. The problem they face is that there are many more variables in the economy at large than in a single stock, so it is almost impossible for them to predict correctly.