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The Self-Driving Investment Portfolio Might Just Crash and Burn

The Self-Driving Investment Portfolio Might Just Crash and Burn

By    |   Monday, 30 October 2017 10:19 AM

We don’t have to worry about robots replacing us any time soon, if Google's self-driving car project Waymo is any indication of what the future holds.

These cars have been involved in several crashes due to their failure to handle intersections like human drivers do.

And it’s not just cars experiencing technical difficulties. Earlier this month, a trader bot was unable to detect a false deal: That Google had purchased Apple for only $9 billion.

A human could detect this error, but robots – not so much. There have been plenty of claims that robos will take over investing, but unfortunately for quantitative funds investors, the outlook is bleak.

Quant funds vs. actively managed funds

What if algorithms could manage your portfolio? This is the promising idea behind quant funds. Quant funds were originally introduced as a potential alternative to actively managed funds. After all, computers are supposed to be better than humans when it comes to crunching numbers

Rather than having a fund manager or a team of manager use analytical research, historical data, forecasts and their own experience, artificial intelligence (AI) uses complex algorithms to make the most logical decision for your portfolio. Additionally, quant funds have been an attractive option for investors thanks to low fees and the promise to eliminate human errors.

The self-driving investment portfolio

Just like a Waymo car getting hit at an intersection, quant fund AIs simply didn't make the cut. Goldman Sachs launched its quant fund program in the early 2000s and has invested billions in the project. While the average equity fund was up 9.7 percent during the first quarter of 2017, quant funds saw a very disappointing increase of just 0.6 percent. This poor performance can't be attributed to quant funds being in their infancy stage. The data has only validated the views of quant fund skeptics.

Quant fund skeptics were nicknamed Luddites after the 19th-century English workers who destroyed the machines that were threatening their jobs. History shows that industrial progress cannot be stopped and is not necessarily a bad thing, but current statistics are proving these modern-day Luddites right.

Why are quant funds failing? The algorithms behind these funds use financial data, yet lack the human touch and personal experience from which fund managers benefit. The numbers don't lie - quant funds are not the investment vehicle of the future.

Low interest rates are here to stay

Aside from inexperienced robot investors, there’s another current issue threatening investors: low interest rates.

Warren Buffett believes that these low interest rates are a reflection of the current economy and that now is a good time to invest in stocks, which are historically "on the cheap side."

It is true that the economy is growing. The Dow Jones hit the 23,000 points milestone for the first time in October 2017, probably due to anticipated tax cuts.

However, Buffett - and the quant fund bots - are relying on historical data from a time when governments would increase interest rates when the economy performed well. We are currently in a dynamic where governments deliberately keep interest rates low.

This problem is not only affecting the United States. There are currently 19 European countries where interest rates have been under 1 percent for the past two years. Greece is a prime example. The Greek jobless rate is currently at a 6-year low and the economy is picking up, but the European Central Bank is still freezing interest rates.

Low interest rates mean that safe high-yield investment vehicles, which previous generations used to finance their retirement, are no longer available. Those products are not coming back because governments don't want to raise interest rates. Even municipal bonds are not what they used to be. A recent attempt to issue municipal bonds to get Puerto Rico out of debt failed so badly that it actually created more debt.

Back to the books

In the absence of safe high-yield investment products and the appearance of quant funds failing to deliver significant yields, actively managed funds are the most attractive option.

Unless the government starts increasing interest rates soon to keep up with the economic growth, investors will need to take risks and pay management fees to invest their money in products with a decent yield.

Chris Markowski (@ChrisMarko) is an author, investment banker, stock market analyst and consumer advocate. He is the personality behind Watchdog on Wall Street and founder of Markowski Investments

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We don't have to worry about robots replacing us any time soon, if Google's self-driving car project Waymo is any indication of what the future holds.
self-driving, investment, portfolio, crash, burn
Monday, 30 October 2017 10:19 AM
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