Choosing an investment company? Ask a reindeer
Nick Britton, Head of Training, AIC finds out what happens when you ask 1,000 reindeer to pick ten investment companies.
You might remember when Orlando, a ginger tabby, beat a panel of stock-picking professionals in a challenge set by the Observer newspaper.
Orlando’s stock portfolio, chosen by throwing a toy mouse on to a grid of numbers representing different companies, delivered a better return than a portfolio selected by professional investors.
Animals don’t just beat fund managers, they also beat tracker funds. A recent study by Cass Business School involving 10 million portfolios picked by ‘monkeys’ found that almost all of them outperformed the US market, and by a long way.
Given the success of Orlando the cat and the 10 million monkeys, we thought it might be interesting to apply a similar approach to investment companies – an idea generously shared by journalist John Burke. As it’s December, and Orlando was busy, we’ve used reindeer instead – but the principle is the same.
Here’s how it worked. Each one of 1,000 reindeer picked ten investment companies out of all those with a 20-year track record. We imagined £100 had been invested into each of these companies 20 years ago and calculated what the value of the portfolio would be today.
Here, for example, is Prancer’s portfolio. Needless to say, just like that of the other 999 reindeer, it is entirely random, though Prancer does seem to have a bias towards Asia and smaller companies:
| Company | AIC sector | 20 year total return on £100 (to 30/11/2015) |
|---|---|---|
| Asian Total Return | Asia Pacific - Excluding Japan | 232.44 |
| BlackRock Latin American | Latin America | 427.03 |
| Hansa Trust (A Ord) | Global | 629.86 |
| Majedie | Global | 253.92 |
| Martin Currie Asia Unconstrained | Asia Pacific - Excluding Japan | 256.38 |
| Martin Currie Global Portfolio | Global | 448.58 |
| Montanaro UK Smaller Companies | UK Smaller Companies | 724.31 |
| Northern Venture Trust | VCT Generalist | 476.41 |
| TR European Growth | European Smaller Companies | 771.19 |
| Worldwide Healthcare | Sector Specialist: Biotechnology & Healthcare | 1,882.33 |
| Total return on £1,000 | 6,102.45 |
As you can see, Prancer’s picks would have delivered a return of just over £6,102 for the original investment of £1,000 (£100 into each of the ten investment companies selected).
So what’s the overall conclusion? Well, reindeer are almost as good at picking funds as they are at delivering presents. Not one of the 1,000 portfolios was a dud. The worst performer delivered £3,049 for £1,000 invested: that’s a return of 5.7% a year, more than double inflation.
Of the 1,000 portfolios, all but seven beat both the UK and global stock markets (represented by the FTSE All-Share and the MSCI World index). The average portfolio returned £5,869, while the best delivered £10,371. Here’s that winning portfolio in full (congratulations, Dasher):
| Company | AIC sector | 20 year total return on £100 (to 30/11/2015) |
|---|---|---|
| Baring Emerging Europe | European Emerging Markets | 1,531.68 |
| BlackRock Throgmorton Trust | UK Smaller Companies | 663.56 |
| Fidelity European Values | Europe | 1,054.54 |
| Henderson EuroTrust | Europe | 1,327.04 |
| Lowland | UK Equity Income | 748.81 |
| Merchants | UK Equity Income | 423.67 |
| Northern Investors Company | Private Equity | 1,360.86 |
| Personal Assets | Global | 448.24 |
| RIT Capital Partners | Global | 911.01 |
| TR Property | Porperty Securities | 1,901.41 |
| Total return on £1,000 | 10,370.82 |
Of course, our results are prone to what’s called survivorship bias. In other words, we did not allow the reindeer to select investment companies that have wound up within the last 20 years.
To reduce this problem, we pushed our luck with the red-nosed stock-pickers and asked them to repeat the experiment, this time over a ten-year period.
As you might expect, the results are a bit more mixed. But it’s still interesting to note that out of the 1,000 randomly selected portfolios of ten investment companies, not one of them delivered a loss over ten years. The worst result was a return of £1,132 for £1,000 invested, the best was £3,079, and the average a healthy £2,040, ahead of inflation, the MSCI World and the FTSE All Share indices. So it’s official then: reindeer picking investment companies beat the market. Or to put it another way, it is really hard to mess up when picking investment companies for the long term.
As impressed as I was with the reindeer’s fund-picking abilities, I don’t think I’ll be asking Dasher to overhaul my portfolio. But it has made me perhaps a little less worried about it. For all the fretting we do about fund managers having bad years, discounts widening, or activists sticking their oar in, some golden rules of long-term investing hold true:
- Try and pick companies that will still be around in 10 or 20 years
- Hold on to them
Have a very merry Christmas.
