An index-fund evangelist is straying from his gospel

IN his classic 1973 book "A Random Walk Down Wall Street", Burton Malkiel, a Princeton economics professor, made an assertion that was startling at the time: that "a blindfolded monkey throwing darts at the stock listings could select a portfolio that would do just as well as one selected by the experts". Three years later, Vanguard, the asset manager where he served on the board for 27 years, started the first passive index fund, an innovation that has swept the financial world.

Now, at age 84, Dr Malkiel has had a remarkable change of heart. Maybe the experts can beat the monkeys after all. That is, if the experts are software engineers writing sophisticated algorithms for computer-generated trading.

Dr Malkiel is chief investment adviser for Wealthfront, a pioneering automated investment manager that last week adopted a new approach it calls Advanced Indexing. The strategy aims to exploit market inefficiencies and beat the passive approach, based on an index weighted by stocks' market capitalisation, which he has long championed. This falls within a broad investing category known as "smart beta", beta being a measure of the volatility of a security or a portfolio in comparison to the market as a whole.