If robots are stealing our jobs, why aren’t fund managers redundant?

151130-robots — Robots are already doing a much better job of fund management

Robots are coming for our jobs. Or so we're told.

Yet maybe everyone is getting a little overly concerned about the robot revolution.

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It struck me the other day that there's one white collar profession where we've already seen highly competent robots doing a much better job than most of their human counterparts.

And yet so far, the humans are cheerfully hanging on in there.

I'm talking, of course, about fund management

Humans vs robots active vs passive

Passive' funds don't try to beat the market. They use a mechanical process to duplicate the underlying index. The goal is to track that index, less costs.

The benefit of passive funds is that they are a lot cheaper than active funds. On top of that, very few active managers beat their benchmark consistently over the long run.

So that's the active' vs passive' debate in a nutshell. But the reality is that it's poorly named. I've already made the point on several occasions that there is no such thing as passive' investing.

All of your investment choices are active' ones. If you keep all of your money in cash, that's a choice. It might be driven by apathy more than conscious financial planning, but it's still your choice.

In fact, I suspect that investors who use at least some passive' funds are in fact a lot more active and better-informed than your average investor. If you're using a passive fund, then it means that you've either made the effort yourself to keep your investment costs down, or you've found a half-decent financial advisor who actually keeps an eye on your investment costs.

The key question to ask before you buy an active fund

One of the best things about passive funds is that you pretty much know what you're getting. It only takes a little bit of homework to find out how much it costs, and how good it is at tracking the underlying index. In short, they do what they say on the tin.

With an active fund, you have to do a lot more work. What's the strategy? And does the manager actually follow it?

For example, as John Authers notes in the FT this morning, most UK active funds actually beat their benchmark last year, and are "on course to do so again this year."

But that's primarily because they've avoided the commodity sector, which forms a big chunk of the FTSE index, and have been sticking the money into smaller stocks, which have generally done well.

If you'd realised that was the strategy they were going to follow, wouldn't you have been better just buying a pure small or mid-cap fund?

For me, it all boils down to one key question: "Why am I paying this person good money to do something that a robot would do for far less?"

There are some good answers to that question. You might want to buy an active fund when it's impossible or inefficient to access a market in any other way, perhaps because of the structure of the underlying indices (I'd tend to favour active management for China or Vietnam for example).

Or you might invest in an active manager because they have a proven record of picking a sensible, successful strategy, investing in it with high conviction, and sticking with it through thick and thin. Names such as Nick Train and Terry Smith spring to mind here.

But if you're just buying an active fund because you've heard of the fund house, or because your adviser has recommended it, or because it's been in the Sunday supplements a few times don't.

If you don't want to go to the hassle of researching an active manager, then the chances are you're going to pick the wrong one. And if that's the case, you're far better off going with the robot any day of the week.

And if you're looking for a simple, no-nonsense, buy-and-forget long-term investment strategy, built on cheap passive funds, then I firmly recommend that you take a look at our Lifetime Wealth newsletter. It's proved extremely popular with MoneyWeek readers you can find out why here.