Should I let a human or a robot manage my investments?

Authored on
10 Aug 2023



There’s been a long debate among investment experts about whether you should trust a human fund manager with your money or whether you should plump for a computer algorithm or ‘robot’ to do the hard work for you. Now, some new data has shed some light on that to help you make a decision.

What is active vs passive?

First things first, let’s cover the basics.

There are two different types of investing: active and passive. We wrote an article a while back that covers the different types of investments in more detail. For now, we’ll stick to the short version:

  • Active funds are run by human fund managers who do a lot of research and analysis to work out which investments to buy and which to avoid.
  • A passive fund will invest according to a set of rules or algorithm, run by robots or computers, and will usually try to replicate the performance of a particular market – the FTSE 100 for example, but won’t try to beat it.

What do the figures say?

Now we’ve got that clear, let’s dive into which is best. The investment folk at AJ Bell have been crunching the numbers and found that 44% of active funds that invest in shares have beaten passive funds for the first six months of the year. That’s a pretty broad headline figure, looking at lots of different stock markets, from the US to the UK to global markets. 

The picture wasn’t so attractive for active funds last year, when only just over a quarter outperformed a tracker fund. But these are pretty short time frames, and we know that investing is a long-term game so we should look over the long term too.

When we look at their performance over the past 10 years, it’s not a great result for active funds – as only 38% have outperformed their relevant passive fund. That means that only four in 10 active funds are managing to beat the performance of their passive rival.

But it differs a lot depending on what market you’re looking at. For example, if we look just at funds that invest in the US, only one in five active funds have beaten their equivalent passive fund over the past 10 years. In the UK the figures are better, where 50% of active fund managers have managed to outperform the passive version. And where are active funds doing best? Japan – where 60% have outperformed passives.

What can I do with this information?

The findings also found that two key things make a big difference to the performance of funds: fees and track record.

When you’re selecting an active fund manager, it’s a very good idea to look at their track record and see how well they have done at beating their passive rivals. Obviously, performing well in the past doesn’t guarantee they’ll be great in the future, but it’s a very useful indicator: the longer a fund manager has been able to deliver a better return than the market, the more likely it is down to skill rather than luck.

And fees are king when it comes to picking passives. Passive funds are almost always cheaper than active ones, because you’re not paying humans to do the work (computers are cheaper to pay and don’t demand pay rises).

On average, passive funds charge 0.15% a year but active funds average 0.9% a year. But there is a huge difference between what passive funds charge, essentially for doing the same thing.

Let’s take funds investing in the UK as an example. The most expensive one charges 1.06% a year and the cheapest is 0.05% a year - a huge difference. If someone had £10,000 invested in the most expensive passive fund over the past 10 years, their money would have grown to £16,340 compared to £18,000 for the cheapest version – a difference of £1,660.

*Above fund data is taken from Morningstar.

I think the main thing to take away is that it’s a good idea to be open-minded about both passive and active fund management. Don’t feel like you need to sit staunchly in one camp and entirely ignore the other – there are merits to both depending on the market. Lots of investors will now have a bit of passive and a bit of active in their portfolios.

Past performance is not a guide to future performance and some investments need to be held for the long term. Remember that the value of investments can change, and you could lose money as well as make it.