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Three lopburi monkeys. Cass monkeys investment performance
Business & Finance Series: Research Spotlight

Was 2016 really the year of the monkey?

Cass monkeys produce impressive investment performance in 2016.

by Amy Ripley (Senior Communications Officer)

New research from Cass Business School has confirmed that 88 per cent of one billion, randomly constructed equity indices, outperformed the market cap-weighted approach to index construction over 2016 - which just happened to be the year of the monkey!

The new research builds on previous research from Cass which explored the investment phenomenon of smart beta.  The original research, carried out in 2011, demonstrated that all of the smart beta approaches to US equity investment produced superior – and in some cases vastly superior – risk-adjusted returns to those generated by a market cap-weighted US equity index.  

The experiment

To try to determine whether the poor performance of the market cap-weighted approach to indexing was due to bad luck or bad index design, the researchers constructed an experiment which involved constructing ten million equity indices where the weights in each one were chosen randomly – as if by monkeys - on an annual basis.  

One of the report’s authors, Professor Andrew Clare, said:

“The results of the experiment were surprising and were a real challenge to index providers and to both the passive and active fund management industry who, respectively, track market cap weighted-indices, or try to beat them.”  

Professor Clare said over the period from 1968 to 2011, around 99 per cent of the monkey-constructed indices produced a better risk-adjusted performance than the market cap-weighted approach to index construction – around 9,900,000 monkeys.  

Co-author, Dr Nick Motson, added:

“Our conclusion in 2011 was that the poor performance of the market cap-weighted methodology over that 43-year period was due to bad index design rather than to bad luck.

“According to the Chinese calendar, last year was the year of the monkey, so we thought it would be fun to look at the performance of our monkey index constructors again, to see if 2016 really was the year of the monkey.”

Using one billion ‘monkeys’ and data obtained from Bloomberg, the researchers identified the largest 500 stocks, by market cap, listed on the NYSE, Amex and NASDAQ stock exchanges.  

The Cass researchers then “asked” each of the one billion monkeys to choose weights for these 500 stocks, once, on 31st December 2015.  The researchers then calculated the performance of each of these indices – without rebalancing any of the components (so no transactions costs) – over the subsequent 12 months.  The performance of these monkey-constructed indices was then compared with the performance of the equivalent market cap-weighted index.

Our results

Professor Clare said:

“Our results showed that 2016 really was the year of the monkey: 88 per cent of the one billion indices outperformed the market cap-based index.  We are now in the year of the Rooster – the big question is who will be crowing by the end of 2017 – monkeys or market cap proponents?”

You can read the full report here.

The original research papers can be found here.

The research team comprised of Professor Andrew Clare, Dr Nick Motson and Professor Stephen Thomas, Faculty of Finance, Cass Business School.


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