Monkey magic: How simians are beating fund managers

If you’re a fund manager currently, the pressure to succeed has seldomly been so high – underperformers are being weeded out, and firms are competing to hold on to top talent. But would fund management firms have been better off hiring a monkey?

Well, maybe not, but a new study by Cass Business School’s consulting arm suggests that monkeys would certainly give mediocre fund managers a run for their money. It produced two studies aimed at identifying alternative ways of constructing equity indices, which are used as a benchmark for active fund managers to beat.

It then created ‘monkey’ computer programmes to randomly pick stocks against nearly 10 million indices over the course of 43 years from 1968 to 2011. “We found that nearly every one of the 10 million monkey fund managers beat the performance of the market cap-weighted index,” said Professor Andrew Clare, one of the authors of the report from Cass Business School.

The concept of fund managers being beaten by indices over a sustained period of time is not new. In his 1973 book, A Random Walk Down Wall Street, economist Burton Malkiel said that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts”. This challenge was taken up by the Wall Street Journal in its Dartboard Contest in 1988 – the professionals won 61% of the competitions.

The reality is that fund managers work incredibly hard to keep hold of top-performing fund managers, who maintain the faith of investors if nothing else. The departure of Richard Buxton from Schroders is likely to see some clients take flight with him to Old Mutual, and Jim O’Neill’s retirement from Goldman Sachs Asset Management in February led many to question the sustainability of the business.

Star quality doesn’t guarantee success though – as the poor performance of Anthony Bolton’s Fidelity China Special Situations Investment Trust demonstrates.

“The long run results of the monkeys are likely to cause some surprise and we welcome further debate,” said John Belgrove, Senior Partner at Aon Hewitt, which sponsored Cass’s studies.