The Stock Picking Robots Are Coming


19/04/2017 10:05 AST

The use of robots in the workplace has allowed companies to lower production costs, increase efficiency, and fatten margins. Although it's unlikely that machines will completely displace humans—at least in our lifetime--the conversation is gaining momentum in the world of investing. Money managers are allocating more resources to quantitative model-building and the bot-versus-human narrative has amplified as firms are turning to stock-picking algorithms to entice clients seeking low-cost alpha.

According to PricewaterhouseCoopers, robotic process automation (RPA) concepts--logic-driven robots that execute pre-programmed rules—"have been around for nearly a decade, and they’ve advanced quickly. In financial services, insurance carriers have used RPA in claims processing for quite a while. Capital markets firms are now turning to 'automation' to reduce costs, provide better service, and even make complex regulatory implementations work more efficiently."

In the realm of investment and fund management, the use of robo-based investment strategies is also on the rise, using "rules" based strategies and quantitative metrics to select stocks. The robo trend is resulting in efficiencies and lower fees, which are huge draws for clients, especially since many of these strategies are earning better returns than many actively managed funds.

BlackRock, the largest asset manager in the world (overseeing more than $5 trillion), announced last month that it will consolidate some of its actively managed mutual funds with computer-centric peers. In a recent interview, Laurence Fink (one of the firm's founders), explained, "We have to change the ecosystem—that means relying more on big data, artificial intelligence, factors and models within quant and traditional investment strategies." This belief in algorithm-based investing strategies runs counter to Fink's long-standing mantra, "let the client choose." But that's not to say the firm is abandoning actively managed funds by any stretch--they still account for 16% of total revenue (although Morningstar data shows that only 11% have beaten their benchmarks since 2009).

Last summer, JPMorgan Chase CEO Jamie Dimon said his firm would offer clients a free, automated investment service. According to a CNBC article posted in March, Goldman Sachs is in the process of building a robo-adviser platform to "broaden its customer base outside the super wealthy" (the article says the firm's U.S. private wealth business typically advises clients with an account size of around $50 million).

A recent New York Times article described BlackRock's new plan as a "direct attack on the cult of the brainy mutual fund manager, popularized in the 1980s and 1990s by Peter Lynch, a stock-picking wizard at Fidelity." Nir Kaissar, in his Bloomberg Gadfly column, extends the discussion further; "In fact, had smart beta existed 30 years ago, it most likely would have kept pace with—or even beaten—the most revered stock pickers" (he names Lynch as one).

As an investor in today's market, there are ways that individuals can combine sound stock picking methodologies with a quantitative investment process. For instance, at Validea I have studied the most successful investors of all time, including Peter Lynch and Warren Buffett, and have created stock screening models that allow investors to combine proven strategies into a quantitatively-based investing system.

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