Saturday 14 April 2012

Robot Fund Managers

As the saying goes: If you want a job doing properly, Do It Yourself. That goes for your finances, too.

Alternatively you can hand over your money to a fund manager (for a price) - but your money might end up being managed by a robot!

A recent article in This Is Money reported that Lloyds Banking Group is sacking more than half of its fund managers and replacing them with ‘robot’ funds that use technology to manage savers’ money. So if your money is with Scottish Widows (and no doubt others) be aware that the investment team will be using computers to manage money rather than actively intervening to buy and sell stocks and shares.

The robots - or 'bots' as they are usually called - are actually computer programs that use algorithmic trading rules to decide the timing, price, or quantity of orders, in many cases initiating the order without human intervention.

Wikipedia reports that in 2006 on the London Stock Exchange, over 40% of all orders were entered by traders using robots, with 60% predicted for 2007. American markets and European markets generally have a higher proportion of robot trades than other markets, and estimates for 2008 range as high as an 80% proportion in some markets.

And their use is growing: if you look at live trades on the market, the vast majority are labelled AT or Automatic Trades. I have sometimes watched my own trades being made using Money AM (which is free, but delayed) - and they are usually the only non-AT trade on the screen.

The problem with computer programs is that they go wrong, usually because the software writer does not anticipate all the possible combinations of events. The markets themselves also sometimes have sagged under the pressure for instant trades: a tsunami of automatic trades led to glitches on the LSE in 2009. In the event of another major market slump, it is possible that all the 'bots' would head for the exit at the same time, freezing the market.

For the DIY Income Investor, the ability to trade in milliseconds is not paramount - essentially it is a buy-and-hold approach, with minimal trading; so 'human intervention' is not a problem - the opposite in fact.

So, trust to the 'bots' or go DIY? Your choice.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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