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Practical application of behavioral finance to portfolio construction, management and analysis.


Predicting Returns Using Behavioral Market Barometers

May 1, 2023
This paper introduces market barometers that are based on measurable and persistent investor behavior. I test the ability of U.S. market, international market, and capitalization barometers to predict S&P 500, MSCI EAFE, and Russell 2000 returns, respectively. The empirical results for January 1981–December 2020 are statistically and economically significant and cannot be explained by trailing equity returns or the Institute of Supply Management Purchasing Managers’ Index,1 one of the best measures of economic activity. Barometers are used to develop a set of trading rules that show evidence of superior performance when compared with relevant benchmarks over the period evaluated.

The Active or Passive Equity Decision: A Behavioral Approach

March 7, 2024
The active versus passive management debate has been taking place for as long as we can remember. On the one side are those who believe skilled stock pickers can generate benchmark-beating returns. Although they don’t outperform every quarter or every year, it is believed these managers can generate better returns than the passive index when evaluated over extended periods.

Practice What You Preach: Strategy Consistency and Mutual Fund Performance

December 18, 2022
We propose a novel predictor of equity mutual fund performance, “strategy consistency”, defined as the degree to which a fund picks stocks most chosen collectively by managers with a similar self-declared principal investment strategy. Using a proprietary strategy classification based on textual analysis of fund prospectuses, we show that high-consistency funds earn significantly higher abnormal returns than low-consistency funds. Moreover, high-consistency funds with the strongest prior-month performance earn significantly positive abnormal returns of 4% per annum. Our results help explain why most mutual funds underperform their benchmarks; they pick stocks that do not closely align with their primary strategy.

Harnessing Behavioral Factors in the Investment Process: Behavioral Factors for Picking Equity Managers and Stocks

October 14, 2019
Behavioral finance is sweeping through the financial services industry. Financial advisors are the furthest along, introducing these concepts into their practices, including needs-based planning, outsourcing non-core activities such as investment management, and creating a reassuring behavioral experience for clients.

Returns to Stock-Picking Skill

March 10, 2019
We are witnessing a dramatic flow of money out of active equity mutual funds and a similarly sized flow into index funds. A large portion of these outflows are from so-called closet indexers, funds that claim to be active equity managers but, upon closer inspection, closely track an index while charging active fees. Investors have wised up to this and are heading for the exits, moving into much lower-fee passive funds that provide the same underlying equity return.

The Active Equity Renaissance

March 14, 2017
The Active Equity Renaissance is a series of posts by AthenaInvest Founder and CIO C. Thomas Howard, PhD, and Jason A. Voss, CFA, retired co-portfolio manager of the Davis Appreciation and Income Fund. It proposes an alternative to modern portfolio theory (MPT), pokes holes in MPT’s underlying assumptions, and discusses ways to improve active management returns.