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Random stock picking will beat S&P: Fund manager

The S&P 500, considered to be the a leading indicator of U.S. equities, is flawed, according to one of the U.K.'s most successful hedge fund managers, who said that investors would be better off choosing stocks at random.

With $25.5 billion in assets under management and 297 employees, David Harding's Winton Capital is the world's 14th-largest hedge fund firm, according to January data from investing publication Alpha magazine. Often dubbed as the "Wizard of Winton," Harding is known in the industry for profitable long term bets on oil and gold, as well as making hay during the global financial crash of 2008.

With a slew of alternative investing ideas up his sleeve, he told CNBC on Friday that his skepticism of the S&P 500 was borne from criticism by others of his own trading systems and methods.

"I kind of exploded in anger, I mean not literally but in my head," he said.

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"The S&P 500 is a trading system – the S&P 500 is a set of rules for buying and selling stocks. It's a trading system, and by the way it's not a very good one."

David Winton Harding, founder and president of Winton Capital Management
Adam Jeffery | CNBC
David Winton Harding, founder and president of Winton Capital Management

With 30 years of experience in trading systems, Harding decided to beat the market five years ago with two sets of simple investing ideas. One of these was based on choosing 50 stocks at random.

"You choose stocks at random and weight them equally...we tested the idea and immediately did better than the S&P 500," he said.

"If you have the same expected returns from assets you should put the same weights on them to optimize the portfolio. So if you choose stocks at random and combine them, you will always beat S&P 500, or in 99.99 percent of cases."

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Harding then launched a business around these ideas and said entrepreneurs need to be "impetuous" to be successful. Five years later, the long-only equity system he created has outperformed the market by the amount that it was supposed to outperform, he said, and has raised a $1 billion.

"It's not very big in the long-only space, but it's definitely a calling card," he added.

The argument surrounding fund management isn't a new one. Retail and institutional investors continue to add their voices to the argument over whether intricate portfolios offer greater returns than simply tracking a benchmark like the S&P 500. "Freakonomics" authors Stephen Dubner and Steven Levitt told CNBC back in May that investors might try blind luck and joked that some fund managers might be generally "as good as a monkey with a dart board."

Last year, the U.K. Observer publication found that a pet cat had managed to outperform many fund managers, while bond guru Bill Gross kept a stock-picking cat in his home until its recent death.

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Responding to the Dubner and Levitt, Ron Mock, the CEO of Ontario Teachers' Pension Plan, Canada's biggest single-profession pension plan, told CNBC that there was "some truth" in their assertion, adding that short-term trading in particular had an element of randomness to it.

Meanwhile, Alex Mees, an analyst at JPMorgan Cazenove, which specializes in mid-cap U.K. equities, told CNBC that trying to buy a basket of stocks was problematic. He advocates carefully selecting smaller stocks that are deemed to be undervalued.

"There are so many ideas...you need to marry up the macro and the micro and you need to understand the culture of these businesses," he said.

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