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The miles file

On my first day as a cub reporter 15 years ago, the editor sat me down behind a desk and presented me with a typewriter. Oh, and a very big bottle of Tipp-Ex for the series of mistakes I duly made.

What is the old hack waffling on about, you are probably wondering. Well, many of us underestimate the colossal impact that technology has had on many aspects of everyday life and no more so than its implications for investment management.

I was reminded of this during a meeting with Chris Complin, who has recently been named by an investment publisher as the best UK fund manager for a risk-adjusted performance in 2003.

Complin, who is chief investment officer on JP Morgan Fleming&#39s European equity desk and who also has a PhD in artificial intelligence, said there would have been no call for his skills in the City just 10 years ago because his style of investment would not have been possible without the development of new computer technology. Quantitative analysis, style management, even the measurement of risk – all these are facets of fund management that are taken for granted these days although they are reasonably new developments in finance.

To put this in context, even the accurate execution of an index-tracking strategy would not have been possible at the beginning of the 1990s.

Advances in semi-conductors and software have also multiplied many times the amount of data available to investors. A US fund manager once said there was no great secret to investment, you just had to turn over more stones than the competition. Technology means there are far more stones to turn over.

Try and put yourself in the position of an investment manager at the beginning of the 1990s. Judgements on individual stocks were based on a financial analysis of basic information, broker recommendations, meetings with the management and the manager&#39s own experience. Stockpicking was at the fore.

Today, stockpicking is again the favoured style after momentum investment – chasing stocks higher – ended in tears. But there is vastly more information to sift through than ever before.

Newsflow is now an important factor in stock selection. Wire services Bloomberg and Reuters, several television news channels and print publications all churn out information about companies.

At one extreme, fund managers seek to exploit this wealth of data by applying quantitative analysis. This approach is typified in this country by Barclays Global Investors. Characteristics of a company or stock, such as a share buyback programme, are backtested on as large a pool of data as possible to see whether a reliable pattern emerges.

Results have been mixed. BGI has produced solid second-quartile performance in most areas, which appeals greatly to many institutional investors with a defined set of liabilities, such as pension funds, but is rather less exciting for private savers.

At JP Morgan Fleming, Complin – who is something of a behavourial expert – extends this analysis by applying old-fashioned common sense to the results of technology-powered analysis.

Complin says the pure maths can throw up some bizarre stock selections. He recalls that on certain measures, the statistical models would have suggested buying Vodafone Airtouch at the very peak of its market capitalisation. That would have meant shelling out nearly £4 for a stock that currently changes hands for about £1.37.

Even more conventionally minded fund managers are aided in their decisions by technology. Patrick Evershed, manager of New Star&#39s special situations fund, is a veteran of the investment scene and renowned for his stockpicking. Yet his ability to keep track of the 400 individual companies on his “interesting” list would be near impossible without a powerful personal computer.

So what does this all mean for anyone who has to select a fund manager? One fair conclusion is that groups that have invested heavily in technology might have the edge over competitors which have not. That certainly appears to be the case at JP Morgan Fleming, which started pouring money into technology several years ago.

Resources may well become an even bigger consideration when choosing a fund management house.

However, technology is unlikely to undermine the position of star managers who, whether you like it or not, are a fact of life in the UK retail investment arena. However, they too are likely to become ever more dependent on the power of the microchip.

Richard Miles is investor edtor at The Times


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