This research was covered in the 4 April edition of City A.M. The
headline "Monkeys trump fund managers" refers to the
research findings that a computer simulation of random stock-picking, likened
to the decision making of a monkey, outperformed a traditional market
capitalisation weighted index every time.
Last summer Aon Hewitt and Cass Business
School collaborated on research in the evaluation of the many
approaches in determining constituent weights of equity indices.
The first empirical investigation examined a number of index construction
techniques that comprised two categories:
- Heuristic - simple techniques based on a rule of thumb
- Optimised - techniques involving more complex optimisation procedures
The main finding of this research was that over the period from 1968 to
2011, all the alternative indices considered produced a better risk-adjusted
performance than would have been achieved by passive exposure to a market
capitalisation-weighted index. Indeed, it was determined that even a random
choice of constituent weights would often have produced a superior performance,
especially in comparison to the relatively poor investment returns offered by
the market capitlisation approach. The full research paper "An evaluation of alternative equity indices. Part 1: Heuristic
and optimised weighting schemes (latest version)" can be downloaded at the
In the second investigation, a further approach for determining constituent
weights for equity indices was explored. This particular approach is referred
to as Fundamental Indexation. The research explored the performance
characteristics of indices of US equities weighted according to:
- total dividends paid by a company;
- each company's total annual cashflow;
- each company's book value;
- each company's total annual sales
and also according to a combination of these.
The results showed that between 1968 and 2011 these fundamental index
alternatives out-performed a comparable market capitalisation index. The full
research paper "An evaluation of alternative equity indices. Part 2:
Fundamental weighting schemes (latest version)" can be downloaded at the
second link below.
Dr Nick Motson discusses this research in our video
'Monkeys' beat market cap indices.
This research was developed with the guidance of our Cass
Consulting service. To learn more about how we can apply our
wealth of academic skills and experience to your business needs, contact