Machines Are Rising Over Managers to Pick Stocks

[Eldon]

Score one for the machines.

The largest fund company in the world, BlackRock, has faced a thorny challenge since it acquired the exchange-traded-fund business from Barclays in 2009.

These low cost, computer-driven funds have exploded in growth, leaving in the dust the stock pickers who had spurred an earlier expansion for the firm. The rise of passive investing — exchange-traded funds, index funds and the like — has revolutionized the investment world, providing Main Street investors with greater opportunities at lower fees while putting pressure on even Wall Street's biggest money managers.

...

https://www.nytimes.com/2017/03/28/business/dealbook/blackrock-actively-managed-funds-computer-models.html?_r=0


Have computer science majors supplanted finance majors?  Has "intro to Python" supplanted "intro to financial statement analysis?"

[Tugg Speedman]

Technology is moving into three areas very fast ... Healthcare, financial services, and law.  Robots driven by AI will replace,

stockbrokers/traders/fund managers.  Index funds and $4.95 traders (no matter the dollar size) are eliminating the need for porfolio managers and brokers.  Traders are being replaced by algos.

Surgeons, estimates are 80% of all surgeries can be done by robotic surgery centers that will work 24/7 virtually mistake free (eliminating HIGH malpractice insurance) at a fraction of the cost.

Law - Most lawyers jobs are highly mechanical (real estate closings, wills/trust/estates/, taxes).  All this can be replaced by a website at pennies for the current costs.  So unless you are a litigator in court, which is the hardest thing for technology to replace, you're in trouble.  Enrollment in law schools is at a 30+year low.  College kids are seeing this industry is dying and shying away.

Expect employment in all three of these areas to go down by half.  Expect their operational back office operations to essentially disappear.

... and none of this has even touched on driverless cars.

[Tugg Speedman]

Active management is dying because computers are better and cheaper.
https://www.bloomberg.com/gadfly/articles/2017-03-30/even-best-stock-pickers-can-t-beat-the-smart-beta-bots

BlackRock shook the world of active management on Tuesday when it announced that it had fired five of its 53 stock pickers. BlackRock will also move $6 billion of the $201 billion invested in traditional active management to quant strategies.The announcement may not sound earth-shattering, but it augurs a larger trend: Traditional active management is dying, but perhaps not for the reason you might think. The evidence has piled up in recent years that the vast majority of active managers fail to beat the market net of their fees. A common reaction is that beating the market is too difficult and that it's therefore a waste of time and money to try.

[cheebs09]

What are their thoughts on Apple? Is there any worry of bias if it's a Dell computer?

[Tugg Speedman]

What are their thoughts on Apple? Is there any worry of bias if it's a Dell computer?

Cute.  Try clicks, that is a better insult.



But if you're looking for a serious answer, Apple is Wall Street's biggest undoing.  It is the single largest reason managers are getting killed and being replaced by robots.

The S&P 500 has 500 stocks (obviously).  But your success as a portfolio manager is really about 5 stocks.

Through March 31 the S&P 500 is up 5.53% year-to-date on a price-only basis. This is an annualized rate of 24+%!

These returns are being led by the FAANG stocks, all have outperformed the index:

Facebook is up 23.47% (133% annualized)
Amazon is up 18.23% (96% annualized)
Apple is up 24.04% (137% annualized)
Netflix is up 19.39% (104% annualized)
Google (Alphabet) is 7.48% (34% annualized)


Apple's market capitalization is currently $753 billion while the FAANG stocks total $2.2 trillion.

Apple's market capitalization is currently 3.56% of the S&P 500 (far and away the largest) whereas the FAANG stocks account for 10.55% of the index.

Apple along has accounted for 10.55% of the S&P 500's year-to-date return.  Or, Apple is 0.58% of the S&P 500s 5.53% return for the quarter.

All the FAANG stocks accounted for 29.65% the of the S&P 500's year-to-date return.  Or, FAANG is 1.64% of the S&P 500s 5.53% return for the quarter.

The other 495 stocks in the S&P 500 are more or less cannon fodder.

Here's the problem ... services that track portfolio performance show that less than 5% of all active money managers are over-weighted these five stocks (meaning they have a larger share of their portfolio in these stocks than the S&P 500).

Other than 82, who is so excited about Apple that he post every time is makes a new high, and with language that suggests he soiled himself while writing it, most of Wall Street is miserable because of Apple's huge performance.  So they are being replaced by robots and index funds.

[Tugg Speedman]

Following up on the above, Wall Street Research is quickly becoming obsolete.  This chart is not good, their will be a major bleed-letting of research analysts.



From

http://www.economist.com/news/finance-and-economics/21719829-unable-give-their-research-away-they-will-struggle-find-buyers-it-banks