In April, I talked about an experiment done by some (presumably drunk) researchers at Dartmouth College who let reindeer pick stocks from the Wall Street Journal. As I mentioned back then, the reindeer did quite well in the first month after they picked their stocks and managed to outperform the S&P 500 by 4.9%.
As the year draws to a close, it is time to check in on those reindeer since they are now getting ready for another Christmas season and will presumably be busy delivering presents rather than reading the Journal and adjusting their portfolios. Though, as we will see, some of them better sell a couple of stocks to lock in their losses and use them in future years to offset future capital gains. But then again, reindeer live at the North Pole and that is international waters, so I think they may not have to pay taxes to begin with.
While Rudolph and Blitzen invested in market ETFs (Rudolph in the Vanguard Small-Cap ETF and Blitzen in the Vanguard Emerging Market ETF) the other reindeer predominantly picked individual stocks, following their proprietary active investment strategies. We don’t know the details of every reindeer’s investment process and the analysis they made for each stock they picked, but we can analyse their portfolios and find that they exhibit strong herding behaviour and predominantly selected momentum stocks in the consumer, technology, and healthcare sectors. Today, we know that these three sectors have not performed too well, so it is no surprise that the average reindeer portfolio underperformed the S&P 500 by 10.4% year-to-date. Because the reindeer typically selected very concentrated portfolios with 5 stocks, the tracking error of their portfolios was large at 6.9% creating an information ratio of -1.5.
Average reindeer performance vs. S&P 500
Source: Liberum
But while the average performance lagged the S&P 500, there was a wide divergence between the individual reindeer. The chart below shows the year-to-date performance of each reindeer in comparison to the S&P 500 and the average actively managed US equity fund as reported by Morningstar.
Performance of individual reindeer year-to-date
Source: Liberum
Three reindeer have had an enormously successful year, beating the S&P 500 by more than 8 percentage points each. Cupid, the best performer this year followed a core-satellite approach, investing in the Schwab Broad Market ETF, the Invesco QQQ Trust, and the iShares 7-10 year Treasury ETF as core holdings and then adding railway leasing company GATX and insulator manufacturer Aspen Aerogels as satellite investments. And while GATX roughly matched the overall market, Aspen Aerogels is up 234% year-to-date.
Dasher meanwhile followed a classic stockpicker strategy and seems to have had a great year, with four out of his five stocks outperforming the market. In particular, Dasher was the most contrarian investor in the herd, selecting an Indian bank (ICICI Bank), energy (Chevron), and a utility stock (Evergy) together with two retail stocks. Vixen also followed a stock-picking strategy but with mixed success. While Jones Lang Lasalle is up 75% year-to-date, Jazz Pharmaceutical is down 25%, but on average, Vixen still managed to create strong performance.
On the other end of the spectrum, we have Boris (no relation to the British Prime Minister, I presume) who managed to lose 20.3% of his investment, underperforming the S&P 500 by 46%. Boris’ judgement was universally bad with none of his five stocks coming even close to the performance of the market. Software company Fastly is down 53% so far this year and credit score company Fair Isaac is down 20%. Alcoholic beverage maker Constellation Brands is the only stock in Boris’ portfolio with positive returns.
Overall, eight out of eleven reindeer underperformed the S&P 500 this year demonstrating once more, how hard it is to outperform a passive benchmark in any given year. But active managers may want to know if the reindeer did better than the average fund manager as is so often claimed about monkeys throwing darts. And it turns out that the reindeer certainly did not beat the active fund managers. Seven out of eleven reindeer underperformed the average active fund manager and the average reindeer portfolio lagged the average active fund performance by 1.8%. And while we can’t say anything about monkey fund managers, it seems reindeer don’t pose an existential threat to the fund industry at the moment.
👏🏻👏🏻