Earlier this year, I wrote about an experiment conducted by some researchers at Dartmouth College who let reindeer choose stocks from the Wall Street Journal. The reindeer did quite well in the first month after picking their stocks, managing to outperform the S&P 500 by 4.9%.
As 2021 draws to a close, it’s time to check up on those reindeer, as they’re now gearing up for another Christmas Eve sleigh ride and will presumably be busy delivering presents instead of reading the magazine and adjusting their portfolios. Although, as we’ll see, you may want to sell some shares to lock in your losses and use them to offset future capital gains. But then again, since they usually live in the North Pole, international waters, they might not have to pay taxes to begin with.
While Rudolph and Blitzen invested in exchange-traded funds (ETFs), the former in the Vanguard Small-Cap ETF and the latter in the Vanguard Emerging Markets ETF, the other reindeer largely followed the their active investment strategies and favored individual stocks.
We don’t know the details of each reindeer’s investment process or the analysis they did for each stock they selected, but we can study their portfolios. It turns out that they exhibit strong herding behavior, with a clear preference for momentum stocks in the consumer, technology and health care sectors. We know today that these three sectors haven’t performed well this year, so it’s no surprise that the average reindeer portfolio outperformed the S&P 500 by 10.4% through December 13th. Because reindeer tend to select highly concentrated portfolios of five stocks, the tracking error of their portfolio was large at 6.9%, creating an information ratio of -1.5.
Average reindeer performance 2021 vs. S&P 500*
* Until December 13
But while the portfolios underperformed the S&P 500 on average, there was wide divergence among individual reindeer. The chart below shows the performance of each ren compared to the S&P 500 and the actively managed US equity fund through December 13, as reported by Morningstar.
Individual performance of the reindeer 2021*
* Until December 13
Three reindeer have had a hugely successful year, outperforming the S&P 500 by more than 8 percentage points each. Cupid, this year’s top performer, followed a central-satellite approach. It invested in Schwab US Broad Market ETF, Invesco QQQ Trust and iShares 7–10 Year Treasury Bond ETF as core holdings, then added rail leasing company GATX and insulation maker Aspen Aerogels as satellite investments beds And while GATX roughly matched the overall market, Aspen Aerogels is up 234% year to date.
Dasher, meanwhile, followed a classic stock-picking strategy and appears to have had a great year, with four of its five stocks beating the market. In particular, Dasher was the most contrarian investor of the herd, picking an Indian bank (ICICI Bank), energy (Chevron) and a utility stock (Evergy) along 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 generated a strong return.
At the other end of the spectrum, Boris managed to lose 20.3% of his investment, underperforming the S&P 500 by 46%. Boris’s judgment was universally poor. None of its five stocks came close to matching the market’s performance. Software company Fastly is down 53% so far this year, and credit-scoring firm Fair, Isaac and Company is down 20%. Liquor company Constellation Brands, maker of Corona Extra, is the only stock in Boris’ portfolio with positive returns.
Overall, eight of 11 stocks underperformed the S&P 500 this year, once again demonstrating how difficult it is to beat a passive benchmark in any given year. But did the reindeer do better than the average fund manager? Ever since Burton Malkiel posited that blindfolded monkeys throwing darts at the financial pages could build a portfolio as good as the experts, active managers have had something to prove. And it turns out they were more than a match for the reindeer. Seven out of 11 reindeer underperformed the average active fund manager, with the average reindeer portfolio lagging the average active fund performance by 1.8%.
So while we can’t say anything about monkeys throwing darts, reindeer choosing the inversions of the Wall Street Journal they do not pose an existential threat to the fund industry. At least not yet.
For more information from Joachim Klement, CFA, don’t miss out Risk profile and tolerance i 7 mistakes every investor makes (and how to avoid them) and subscribe to his regular comment a Klement on investment.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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Joachim Klement, CFA
