You’ve earned your money and you don’t want to put it in the bank—so how do you invest it? One answer has always been to get on the phone to a fund manager who, for a fee, would start putting your cash into new, hot investments. The returns from this can be substantial and over the years it has been a system that made people a lot of money.
But it brought with it a whole host of problems and compromises. For one thing, to get into an “active” fund—that is, a fund managed by an individual or team picking stocks based on their own expertise—you needed to be ultra-wealthy. Second, the fees charged by those fund managers could be pretty steep. And third, there was no guarantee your returns would be any better than simply buying stocks in the top 20 companies listed on the FTSE 100.
In short, the fund management world of old was expensive, exclusive and pretty risky. Worst of all, you were locked in. Once your money was in a fund, it was often very difficult to get it out again. It was an industry ripe for disruption.
In the wake of the financial crisis, that disruption came. Fund managers had eaten up huge losses and the star fund managers of old had lost a good deal of their shine, as they became caught up along with everybody else in the herd behaviour that led to the crash of 2008.
In the place of these “active” funds there began to emerge a new breed, so-called “passive” funds, where instead of hyper-complex investment strategies, fund managers simply bought a piece of the FTSE 100, or some other big index. It was a strategy that—somewhat embarrassingly—turned a better profit than the more exotic strategies.
Passive funds can easily be automated—that is, managed by computers. Customers can now access them online, open an account, select the degree of risk they want and put in their money. It’s a type of fund management that omits the gung-ho stars who acted on instinct. In their place came the quiet hum of the algorithms—and it turned out that computers were pretty good at managing people’s money.
“The fund management world of old was expensive, exclusive and pretty risky. It was an industry ripe for disruption”So good, in fact, that money has flowed from the old to the new. In 2016, $240bn went into these new automated investment funds, while an almost equal amount left the old “active” fund management industry.
The new funds, often referred to as “Robo-investors” offer a lot that the old ones can’t. First, anyone can use them—they aren’t reserved for “High Net Worth Individuals.” Most platforms will let you join with an opening investment of around £500; some have no minimum at all. Also, because the teams of fund managers have been replaced with computing power, the fees are lower. The automation of these systems means you’ve got more of a say over what your money goes into—and when you can take it out again.
And the sector is popular. The amount of assets under management by robo-advisors is expected to be $1.5 trillion in 2018. That number is expected to rise to $4 trillion by 2019.
There’s a sense of inevitability about a change of this sort. The increased power of computer processors has led to a wave of automation, from call centre operators to supermarket check-out staff. Computer-led systems are replacing large sections of the workforce—it’s no real surprise that the same is happening in fund management.
Counterintuitively, perhaps, the rise of the automated systems has been a good thing for the old style “active” fund management industry. The new competition from online offerings has chased many of the more mediocre fund managers out of the industry. And it was always an industry in need of whittling down. A survey by the S&P ratings agency found that, in the years from 2006-16, 86 per cent of European funds had underperformed the market—in other words, simply putting money into the FTSE 100 would have made you a better return.
The robo-investment platforms represent a more mechanistic view of markets. Instead of hunches, the algorithms behind new investment platforms sift data and provide options for investors. The result is a fund management world that is more open to a wider range of investors—and perhaps a little more boring than in the past. And perhaps that is the real legacy of the shock of 2008: that after the financial crisis, the slow and steady investment platforms look more like the future than anything else.
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