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The dangers of index investing over the next decade

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Investing in index tracking funds will prove a troublesome strategy in the next decade as technology risk replaces macroeconomic risk as the number one threat to investors according to Neptune Investment Management’s CIO James Dowey.

Dowey, who is also Neptune’s chief economist, says that after 10 years of dominating the behaviour of global stock markets, the effects of the macro crisis are set to be replaced by two dominant themes going forward. The first of these is a rising interest rate environment and the second is the rapid developments taking place in the tech sector, which Dowey says is set to “confuse and disrupt” markets.

“The changes taking place in technology will lead to a mixed reaction in markets and in this environment investing across indices as an investment strategy will not work,” he says.

“Individual investors will need to think of a response and rather than be stuck in index tracking funds, a better strategy over the next decade will be to allocate to good active managers who, rather than spot the winners, can miss the losers in this environment.”

This is because he says that established businesses will see their existing business model ripped apart by the “exponential” pace of tech change in the next decade.

As such he says getting tech right will be a vital call, with many sectors including healthcare and financials, set to be heavily impacted.

“The financial sector is badly positioned to think of the changes taking place in these terms.” he argues. “However it does present opportunities for investors to take advantage of these huge changes.”

In terms of interest rates Dowey is confident the Federal Reserve will make its first move upwards in December after last week’s positive payroll report which showed the US unemployment rate, at 5%, was at its lowest since April 2008.

“The UK will probably be one year behind the US, while Japan and Europe are still in their QE phase so are unlikely to raise soon,” he says.