Rise of the machines

There have been a bunch of articles out in the last week about the rise of the machines driving fund managers out of business. The headline is way more exciting that the details though.

The detail is that computers are making fund managers more efficient.

From the NYT

Score one for the machines.

The largest fund company in the world, BlackRock, has faced a thorny challenge since it acquired the exchange-traded-fund business from Barclays in 2009…

…Now, after years of deliberations, Laurence D. Fink, a founder and chief executive of BlackRock, has cast his lot with the machines.

On Tuesday, BlackRock laid out an ambitious plan to consolidate a large number of actively managed mutual funds with peers that rely more on algorithms and models to pick stocks.

and this morning from the AFR:

It seems BlackRock’s local stockpicking team isn’t immune to the great man vs machine debate playing out inside the $US5.1 trillion money manager.

BlackRock globally is relocating the research behind its “scientific active equities” quant funds to San Francisco, as it looks to reshape traditional methods of equity investing and keep up with client demands.

The real story is a little lower:

“Traditional methods of equity investing are being reshaped by massive advances in technology and data sciences. At the same time, client preferences are shifting, focusing not just on outcomes but on how both performance and fees impact value,” said BlackRock’s global head of active equities Mark Wiseman.

It follows changes announced last year to combine its quantitative and fundamental investment teams into what it calls a “cohesive active equity investment platform”.

The story is the same in hedge-fund land where managed futures (which use quant models to allocate between asset classes) attracted all the new money in 2016:
Hedge fund flows to quantitative strategies

What is really happening is the same the world over in countless industries. More powerful systems mean that fewer employees can do more.

In construction, better equipment means fewer labourers. On farms better tractors mean fewer farm hands. In factories better robots mean fewer process workers. In logistics GPS tracking and computerisation mean fewer drivers, few storemen.

Blackrock is going down a very similar path to the one that I am using for the fund: A quantitative system to screen stocks, coupled with fundamental analysts to go through the stocks to make sure that the quantitative systems are not throwing out value-traps.

You need a lot fewer analysts (we have ten) to verify quantitative information and then dig deeper into the fundamentals for the interesting stocks than you need to create an analyst team to cover 2,000 stocks worldwide.