New Study: monkeys more adept at stock picking than seasoned professionals. Not entirely true, but an active monkey exceeded a passive investment fund. The studies have been done in many variations over the years where randomly a randomly selected portfolio of stocks, picked by monkeys throwing darts registered better returns than ETF tracker funds, or a basket of stocks in a portfolio.
Another strand was the blindfolded person throwing darts and their buy-and-hold outperforming the experts over the long haul. So, is there a free lunch on Wall Street? Yes and no. The mutual funds and other commission and fee based revenue on transactions is a tremendous industry that in effect bleeds investor returns, or at best picks the carcass of the novice and financially illiterate who confides their earnings to people they have never met. Realistically, portfolio return has no iron-clad rule, as there are many ways to skin the cat in using the combination of beta, size, value and complementary metrics, and the good portfolio manager’s antics will beat the monkey and the market….
(see link at end)…Ten million portfolios containing stocks randomly selected as if by monkeys managed to produce better profits than a tracker fund over 40 years, academic research has concluded. The tracker fund was made up of stocks weighted according to their share of the market, thus raising the question as to whether this is an appropriate strategy to build passive investment funds. The majority of passive tracker funds are constructed this way. A tracker aims to mirror or “track” the performance of any of a number of worldwide stock market indexes, such as the FTSE 100. A FTSE 100 tracker is proportionally invested into the 100 companies in the index based on how large those companies are – their market capitalisation. But the new research, conducted by Cass Business School and sponsored by Aon Hewitt, questions whether there is a better way to construct indices and the funds that track them….
…The study is based on monthly US share data from 1968 to 2011 and looked at 10 million indices weighted randomly. These “monkey” funds consistently delivered much better returns to the weighted approach. John Belgrove, senior partner at Aon Hewitt, said: “While market capitalisation weighted benchmarks remain the bedrock to performance assessment and portfolio construction, this work sheds fresh light on the age-old active versus passive investment management industry debate….
…Passive funds have become increasingly popular over the last couple of years as investors get fed up for paying over the odds for failure.
“Charges are an increasingly important factor for investors, and rightly so, as the greater transparency of fund costs is allowing investors to see more clearly how much they are paying for their fund manager’s expertise,” said Philippa Gee, a wealth manager. “While you might expect the annual fee of an active fund to be at least 1.75pc, or much higher for certain specialist funds, a tracker fee could be as low as 0.2pc, depending on which index it is covering.”
Passive investment can be done using a tracker unit trust or exchange-traded fund (ETF). Trackers can be bought and sold like any other unit trust or Oeic via a fund platform. ETFs are listed on the stock exchange like a share.Read More:http://www.telegraph.co.uk/finance/personalfinance/investing/9971683/Monkeys-beat-the-stock-market.html