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What happens when reindeer pick investment companies?

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8 December 2015

Nick Britton, Head of Training at the AIC, wonders whether reindeer might be better at picking investment companies than he is.

You’ve probably heard of monkeys picking stocks, usually with consequences that are embarrassing for someone. Cats are in on this game too. You may remember when Orlando the cat beat a panel of stock-picking professionals in a challenge set by the Observer newspaper.

Well, we don’t have a cat and the monkeys all seem to be too busy – presumably picking stocks (one of the latest studies, by Cass Business School, involved 10 million monkey portfolios, which must have involved forced animal labour on an astounding scale).

So we have asked Santa to borrow a thousand of his reindeer for our own, more modest version of this experiment – an idea generously shared by journalist John Burke. Please be assured that no animals were harmed in the process.

What we asked each of the reindeer to do is pick ten investment companies from those with a 20-year track record, the object being to see how these 1,000 reindeer portfolios would have performed over that period.

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
Asian Total Return Asia Pacific - Excluding Japan 232.44
BlackRock Latin America 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

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 – an annualised return of 5.7% which was more than double inflation (2.8%).

Of the 1,000 portfolios, all but seven beat both 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
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 Property Securities 1,901.41
Total return on £1,000   10,370.82

Of course, our results are prone to survivorship bias. Had we sent the reindeer back in time to 1995 and asked them to make their selection, they would have opted for some investment companies that are now no more. Not all of these, though, would have been disastrous investments. Some would have been rolled over into other companies, while others would have returned cash that could have been reinvested.

To reduce the problem of survivorship bias, we pushed our luck with the reindeer 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. 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:

  1. Try and pick companies that will still be around in 10 or 20 years
  2. Hold on to them

Have a very merry Christmas.