What's that about robotics-based stock pickers supplanting humans?
Maybe someday, but for now, flesh-and-blood money managers are producing better investment results, and are doing so by a wide margin.
That data comes from New York City-based Preqin, which tracked the performance of computer-generated stock-pickers versus their human, hedge fund counterparts using traditional discretion-based strategies over the first six months of 2017.
The result? The human beings won going away, returning 5.99% versus 3.17% for computer-based investment selectors.
(It's worth noting the Standard & Poor's 500 bested both, returning 8% over the same time period.)
With all the fanfare over fin/tech and robotics, is it a surprise that the hedge fund pickers bested the computers? Not really, financial industry veterans say.
"Humans by far own the stock-picking advantage," says Alexander E. Parker, senior managing director at The Buxton Helmsley Group, Inc. in New York. "The basic reason why is that computers cannot pull together all of the dynamics of a business and understand basic business numbers."
Robo-advisors simply have to take numbers at face value and try to pick the stocks based on the concrete numbers available, Parker says. "The computer also doesn't understand whether human reaction to news is overreaction, which many times will make a stock quite cheap," he says. "Also, robotic algorithms are not able to pull together even basic market situations where you have cycles in businesses that create unattractive financials in the short-term."
Robo-advisors are reactionary and not anticipatory, Parker says. "They will rebalance because of historical market fluctuations that have already occurred," he notes. "The most money is made when you are an anticipatory investor."
There are areas where computers can excel in portfolio management, but investors and advisors need to where to look, other experts say.
"Computers can still only do what we tell them to do," says Nathan Edwards, a money manager at IMG Wealth Management, in Jacksonville, Fla. "This gives systematic trading an advantage under certain conditions. Right now the ideal conditions for computers are in asset allocation and rebalancing, as long as no one position is allowed to assume too large of a weighting."
"Computers succeed in those areas because they have to stick to a model that has its backbone in research that has demonstrated success over prolonged periods of time, and won't blow it when tough decisions have to be made like humans routinely do," Edwards says.
The "crippling disadvantage" for computers, is that they're relegated to the very recent past, Edwards adds. "To achieve a statistical advantage, they have to examine relationships that happened pretty recently, and then they are chained to their program," he explains. "Where a computer looks at the risk versus return characteristics of high yield bonds over the last year and calculates a very attractive risk adjusted return, a knowledgeable human intuitively sees beyond the recent glitter and adjusts accordingly."
Not everyone is convinced that human stock pickers have the advantage over digital-based tools.
"I have not seen a serious, peer reviewed study, that provides convincing evidence that human money managers regularly outperform or that they are somehow particularly skilled at picking stocks," says David Weinbaum, associate professor of finance at Syracuse University's Martin J. Whitman School of Management.
Some managers may well have such skills, but identifying them before the fact is extremely difficult, and truly separating skill from luck remains a challenge, Weinbaum notes. "In fact, investors have noticed this as well: inflows into Vanguard, a fund family that focuses on low-cost index funds as opposed to stock picking, dwarf those of all of all of its competitors combined," he says.
"Also, the world's largest asset manager, Blackrock, announced in March that it would start promoting computer-based investment methodologies rather than stock picking," he adds.
That's just smart business, but that said, investment companies who rely strictly on computers to run their portfolios may be doing their clients a big disservice.