Michael Barr & Co Ltd has nominated an orang-utan as an honorary fund manager. The orang-utan provides an entertaining way of explaining some of the "secrets" to ensure investors have a successful experience.

An Orang-utan is a better fund manager

The world is full of fund managers and advisers telling us that they can beat the markets.

The law of averages tells us that only half will succeed. Half will have above average performance, and half will have below average performance. You can't beat the averages.

An orang-utan as a fund manager is a metaphor for our method of fund management based on science, probability, and the best academic research.

If an orang-utan throws darts at the stocks listed in Financial Times, enough to build a portfolio that represents the stock market, the success rate of this portfolio will be better than the fund management industry.  But how can this be so?

Working for Bananas

The ‘average’ performing fund manager does no better or worse than the market. However, there is another factor. The problem is fund managers are very expensive to employ, they knock up high costs when chopping and changing their portfolios, and the consequence is that more than half of all fund managers under-perform the market. Over time the effect of high charges is crippling, with three-quarters of them under performing the market over 10 years.

The orang-utan portfolio has been selected in a passive way, and this is the methodology behind an index fund (Michael Barr & Co uses institutional asset class funds). The reason these perform better than the highly paid fund managers is because the performance is consistent, and the costs are low - in the case of the orang-utan a payment in bananas!

Trying to pick the best

This is the time when Financial Advisers say they only pick the best fund managers.  Well, if you can find a reliable method for doing this, the world is waiting to hear from you.

The truth is there is no reliable method to find out who will perform better next year, and many of those fund managers who have performed well have just been lucky or they have taken more risk. The law of averages is at work again, but the lucky ones make more noise. There is a good deal of research confirming this statement, including the FSA's own research. (FSA Article)

When you pick a fund manager you take a great leap in faith, and more often than not, you will be disappointed.

Lowering the costs of investing

Why pay two or three times the cost when you can pay so much less, and at the same time avoid the risk of under-performing markets?

Institutional asset class funds have no bid offer spread and very low annual costs.  If on the other hand you buy a fund with a bid offer spread of say 5%, and pay high annual costs you have a hill to climb and the charges are a regular drag on the investment performance.

In summary, the ‘orang-utan method’ avoids the risk of under-performing, you know the result will be consistent with market returns, and over ten years you can expect to be in the top quartile.

To support the orang-utan and its environment visit www.savetheorangutan.co.uk