The best funds to bet against the human

Just four years ago, if you'd wanted to invest in robotics and automation, you'd have struggled to find a broad, diversified fund. You would probably have been forced to invest in a broad technology fund with a small amount of exposure to robo and artificial-intelligence (AI) stocks. But today you are spoiled for choice. To say the sector is hot is an epic understatement I've never seen a niche take in quite so much money quite so quickly.

In the UK, iShares' Automation and Robotics exchange-traded fund (LSE: RBOT) is just over a year old and already has $1bn in assets under management an astonishing sum for a thematic ETF. iShares' smaller rival, ETF Securities, is best-known for its commodity funds, yet its Robo Global Robotics and Automation ETF (LSE: ROBO) has amassed around $900m in assets in just a few years. These numbers are dwarfed by those of their US peers.

Looking at these numbers, you might ask whether the robotics and automation theme is now oversold and overvalued. Yet my hunch is that the AI theme has much further to run, as long as wider stockmarkets don't stumble and fall in the next 12 months (and to be fair, valuation metrics on that front do look decidedly toppy). The bigger question for me is whether the businesses currently listed on the US, UK and Japanese markets will be the ones that will reap the profits from the AI revolution. But if you are a momentum investor, and you think that tech stocks generally will continue to do well, robotics and AI is currently the place to be.

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The next question is which ETF should you invest in? When it comes to specialist markets like these, before you buy an ETF you need to understand what's in the index it is tracking. ETF Securities works with a robo-focused index provider called Robo Global, while iShares' index provider is a combination of iStoxx and Fact-Set (both big data crunchers across a number of markets). Both Robo Global and its iShares equivalent use a systematic approach to index formation, though the former is probably more "active", while the iStoxx/FactSet index is more quantitative, picking stocks based purely on computer models.

It's also useful to look at how the index defines a robotics stock. Robo Global, for instance, divides the available universe of 1,000 stocks into 12 different sub-themes, and then insists that a minimum threshold of revenues comes from robotics and AI. iShares' FactSet runs a similar, but not identical, screen. This all matters, because you want to invest in businesses building market-leading positions in actual robotics and AI, not just generalist IT firms with the odd robotics product.

Finally, if you just look at the cost of the funds, iShares comes out ahead, with a total expense ratio (TER) of 0.40%, versus 0.80% for ETF Securities (though cost shouldn't be the only factor in your decision).

At this point, you might just throw your hands in the air and say just buy me the best-performing ETF! Unfortunately, the data isn't conclusive either way both UK products have performed in a broadly similar fashion, despite having different top holdings. So you have to make your own decision after taking a closer look at the indices and ETFs. But if you like momentum trades and are willing to take the risks, follow the money and bet against the human!

Activist watch

Activist investor RBR Capital has stepped up its demands for more aggressive cost-cutting at Credit Suisse, says the Financial Times. At a meeting with the bank's chief executive in Zurich, the hedge fund apparently toned down its previous call for a break-up of Credit Suisse, with RBR instead working on a plan to bring in a large investor with "fresh capital" to help fund an "accelerated cost-cutting programme".

A sovereign wealth fund is "waiting in the wings", says the FT. Credit Suisse described the meeting with RBR as "cordial", pointing out that its third-quarter results show their current strategy is working well (the bank's shares were up 5% on news that pre-tax profits for the third quarter were up 90%).

In the news this week

Hedge funds are having their best year since 2013, says Cecile Gutscher on Bloomberg. Improving performance, thanks to a "gravity-defying stockmarket" in the US, may go some way to assuaging the criticism that hedge funds charge high fees for mediocre returns. Or perhaps not. Despite the improvement in performance, on average hedge funds still underperformed equity benchmarks, including the S&P 500, which is up almost 16% in the year to date. Equity hedge funds skewed towards healthcare and technology have fared best this year, according to Hedge Fund Research, while funds that took short positions suffered the steepest losses.

And despite not being quite over yet, 2017 is already the best-selling year for UK funds since records began, according to the latest figures from the Investment Association, a trade body for the industry. This was helped by a record-breaking September, during which investors put a net £5.6bn into funds; in the same month last year this figure was only £1.1bn.

In fact, the six highest-selling months on record have all occurred in 2017. The best-selling asset class in September was fixed income, while the best-selling sector was global funds, followed by European equity funds and Japanese funds. The worst-selling sector was the UK All Companies sector, which saw outflows of £111m.