Despite being a foundation of many market indices, a company’s size is possibly the worst performance indicator when investing, delegates have been told.
At seminars in Jersey and Guernsey last week, delegates heard that, in tests carried out over a 40-year period, even randomly selected investments beat the industry-standard benchmark.
BWCI’s Investment Partner, Mark Colton told the audiences that the research, published by Cass Business School, showed that randomly choosing 1,000 shares once a year over 40 years more than doubled the result from the standard market index.
“Market indices are weighted by market capitalisation which means that a big company like Apple counts much more than the tiddlers,” he said. “But company size has not been a good indicator of performance and was the worst of 15 measures used for investment purposes. Fundamental factors, like sales, turnover and profit could be used to decide how many shares to buy, and these made much more effective indices.”
BWCI held seminars last week (Tuesday 17 June in Jersey and Thursday 19 June in Guernsey) at which around 60 industry experts were told about Smart beta, an alternative strategy for stock selection.
“Smart beta is already shaping the strategies followed by investors, and professionally-invested funds. All corporate investors are likely to hear about Smart beta sooner or later, and will want to understand how it might affect their pension, charity, endowment or trust fund,” he said.
While active professional investors were constantly adjusting their investments using their own strategies, many non-professionals now used "trackers" to follow the market indices when selecting their stocks and shares, Mr Colton said.
“The relatively high costs of active professional investment undermine the gains that are achieved. Active managers mostly struggle to beat tracker funds, and the tracker approach was beaten by Smart beta. Its results were significantly better than the market results over 40 years, not just marginal improvements.”
Those responsible for corporate investment are used to thinking of portfolios as quite distinct: a final salary pension plan is very different from the newer money purchase arrangement, for example, and holding shares is not the same as buying a unit trust or a group pension policy. However Smart beta could have a substantial positive effect on them all, and this is one of the reasons it is attracting so much attention, Mr Colton said.