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The Actuary The magazine of the Institute & Faculty of Actuaries

Can monkeys outperform passive funds?



On 19 September, The Actuarial Network at Cass (TANC) held an talk on the topical subject of ‘Smart Beta, Scrabble and Simian Index Strategies’, presented by Dr Nick Motson from the Faculty of Finance at Cass Business School. 

This event was sponsored by the IFoA and attended by 64 guests.

Motson explained that traditional equity indices such as the S&P 500 are constructed by selecting a subset of stocks and weighting each one by its market capitalisation. These indices have low turnover, thus require very little trading and are cheap to track. 

However, since late 2011 a number of alternative weighting schemes, termed ‘smart beta’, have been proposed. These claim to potentially offer superior performance by capturing market inefficiencies in a rules-based and transparent way, and have attracted significant investor interest, with over $500bn tracking smart beta indices by early 2015.

Motson presented the results of Cass’s research where a common set of the largest 500 US stocks were used to examine the historical performance of eight popular smart beta approaches to better understand the possible sources of historical outperformance. 

His talk sparked further interest when he showed that Cass’s own smart beta approach, based upon the rules of Scrabble and randomly created ‘Simian’ indices, all outperformed those based on market capitalisation in most cases. Therefore, to answer our headline question, it appears that, yes, monkeys can outperform passive funds!

The event concluded with a lively Q&A and further discussions during the networking session. TANC’s next event: ‘Activating pension plan participants: art or science?’ will be held in November. 

For details, visit www.tanc-cass.co.uk or email tanc@city.ac.uk to join the TANC mailing list.