Here's an article from Money magazine that says computers are starting to look like pretty savvy investors. Their key points:
"Computers," Sauter says, "can systematically take advantage of all the mistakes we humans make."
Increasingly, Sauter isn't alone in this belief. Charles Schwab (Research) now runs nine quantitative, or "quant," funds in which computers make buy and sell decisions based on their constant crunching of hundreds of thousands of numbers. Of the five Schwab funds that have three-year records, four have whipped at least 75 percent of their peers.
A recent study by Goldman Sachs (Research) Asset Management concluded that while over 15 years a human manager can beat a quant fund in absolute terms, once you adjust for the extra risk the human manager had to take to get that result, the quant fund comes out ahead.
The real advantage machines have over people is that they're not human. Emotions trip up professional money managers like they do the rest of us. Pros hold on to plummeting stocks, not wanting to admit a mistake. Or they rush in when a stock takes off, often too late.
Finally, unlike human managers, computers don't earn six-figure salaries or require legions of analysts to support them. Vanguard's Sauter says he can run his funds with a third of the people needed by the typical mutual fund. So computer-managed funds should be able to charge lower fees than other funds.
So, sounds like computers will beat humans every time, huh? Not so fast. Consider these facts:
The thing is, many don't [cost less]. According to Lipper, computer-managed funds charge investors 1.3 percent of the portfolio in fees a year on average, only a hair less than actively managed funds. And all those data give quant funds itchy trading fingers, driving costs up and returns down. As the funds get bigger, costs should fall.
But the second hurdle they have in trying to outperform is a tougher one: Quant funds have trouble anticipating change. "What you get from a computer is discipline," he says. "What you don't get is judgment." Muhlenkamp has a point. The best human investors have a much better chance of significantly outperforming the market than computers do. On the other hand, human managers are also much more likely to lose you a lot of money.
Here's Money's conclusion:
So keep an eye on quant funds. The ones below have modest expense ratios, and they could help you squeeze a tiny bit more return out of your portfolio without taking on big risk.
My best fund manager is a computer. I invest a lot in index funds, which are run by computers. Their good returns and low costs are just the formula I like. If quant funds can offer the same, I say "bring them on!"
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