Behavioral Portfolio Management: A New Paradigm for Managing Investment Portfolios C. Thomas Howard CEO and Director of Research AthenaInvest 5 May 2014 A CFA Institute Production www.cfainstitute.org Slides provided by speaker 1
Asset Class Returns: 1950 – 2013 $8,000,000 $7,000,000 [VALUE] (10.9) $6,000,000 S&P 500 $5,000,000 T-Bond T-Bill $4,000,000 CPI $3,000,000 $2,000,000 $1,000,000 [VALUE] (6.1) [VALUE] (4.5) $0 [VALUE] (3.2) 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source : AthenaInvest, Thomson-Reuters Financial, Center For Research In Securities Prices, St Louis Federal Reserve FRED data base. A CFA Institute Production www.cfainstitute.org Slides provided by speaker 2
3 Emerging Paradigm Slides provided by speaker A CFA Institute Production www.cfainstitute.org
Convergence of Two Research Streams Finance Behavioral Research Science Modern Portfolio Behavioral Theory Finance A CFA Institute Production www.cfainstitute.org Slides provided by speaker 4
Three Eras of Finance… Fundamental MPT Behavioral 1934 – 1973 1974 – 2013(?) 2014 – Behavioral Graham & Dodd Modern Portfolio Finance Theory Engineered Analyst & Manager Harnessing Market Solutions Skill Emotions Fundamental Market Behavioral Price Intrinsic Value Efficiency Distortions A CFA Institute Production www.cfainstitute.org Slides provided by speaker 5
BPM Basic Principles 1. Emotional Crowds dominate market pricing and volatility • Prices rarely reflect underlying fundamentals 2. Behavioral Data Investors can earn superior returns • BDIs take positions different from the crowd • Emotionally challenging to do so 3. Redefining Risk as the chance of underperformance • Volatility and risk are not synonymous • Volatility is emotion A CFA Institute Production www.cfainstitute.org Slides provided by speaker 6
Behavioral Portfolio Management Release Your Emotional Brakes Understand Randomness Move Beyond MPT • Rationality Model • Sharpe Ratio • Tracking Error A CFA Institute Production www.cfainstitute.org Slides provided by speaker 7
Implementing BPM: Releasing Emotional Brakes A CFA Institute Production www.cfainstitute.org Slides provided by speaker 8
Investor Cognitive Errors WYSIATI Myopic Loss Aversion Anchoring Social Validation Fallacy of Information Availability Bias Fallacy of Control Availability Cascade Peak-end Memories Representativeness Fooled by Randomness Framing Phantastic Objects Thinking, Fast and Slow by Daniel Kahneman 2012 A CFA Institute Production www.cfainstitute.org Slides provided by speaker 9
Implementing BPM: Understanding Randomness A CFA Institute Production www.cfainstitute.org Slides provided by speaker 10
Volatility and Tail Events S&P 500 Annual Returns: 1926 – 2013 2012 2010 2006 2004 1993 2009 2013 Since 1926,US market 2000 1988 2003 1997 2011 1990 1986 1999 1995 2007 produced positive 1981 2005 1979 1998 1991 annual returns 72% of 1977 1994 1972 1996 1989 the time 1969 1992 1971 1983 1985 1962 1987 1968 1982 1980 1953 1984 1965 1976 1975 1946 1978 1964 1967 1955 2001 1940 1970 1959 1963 1950 1973 1939 1960 1952 1961 1945 2002 1966 1934 1956 1949 1951 1938 1958 2008 1974 1957 1932 1948 1944 1943 1936 1935 1954 1931 1937 1930 1941 1929 1947 1926 1942 1927 1928 1933 –50% –40% –30% –20% –10% 0% 10% 20% 30% 40% 50% 60% Rates of Return Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. A CFA Institute Production www.cfainstitute.org Slides provided by speaker 11
Implementing BPM: Excess Returns A CFA Institute Production www.cfainstitute.org Slides provided by speaker 12
Truly Active Equity Funds Active Management Research Active • Amihud & Goyenko Consistent • NYU Management • R-squared (Active) Research Results • Cohen, Polk & Silli Best Ideas • Harvard, MIT, LSE (Conviction) 4% – 6% • Relative Weight Excess • Howard Returns Strategy • Denver University (Consistency) • Own Strategy Stocks A CFA Institute Production www.cfainstitute.org Slides provided by speaker 13
BPM Benefits 25 20.0 20 Annual Return 13.9 15 8.9 10 6.1 5 2.7 0 T-Bills S&P 500 Truly Active Best Idea Best Funds Stocks Markets Data sources : AthenaInvest, Thomson Reuters Financial, and Lipper A CFA Institute Production www.cfainstitute.org Slides provided by speaker 14
Using Behavioral Factors to Select Truly Active Managers and Best Ideas Stocks A CFA Institute Production www.cfainstitute.org Slides provided by speaker 15
Manager Behavior Is Key • How a manager goes about making money: investment strategy • Strategy consistently pursued • Takes high conviction positions Focus on Manager Behavior: Strategy, Consistency, Conviction A CFA Institute Production www.cfainstitute.org Slides provided by speaker 16
Strategy Peer Groups Competitive Position: Business principles, including quality of Profitability: Company profitability, such as gross margin, management, market power, product reputation, and competitive operating margin, net margin and return on equity. advantage. Consider the sustainability of the business model and history of adapting to market changes. Quantitative: Mathematical and statistical inefficiencies in Economic Conditions: Top down approach based on economic market and individual stock pricing. Involves mathematical fundamentals; can include employment, productivity, inflation, and and statistical modeling with little or no regard to company industrial output. Gauges where overall health of economy is in and market fundamentals. business cycle, resulting supply and demand situations in various industries, and best stocks to purchase. Risk: Control overall risk, with increasing returns a secondary consideration. Risk measures considered may Future Growth: Companies poised to grow rapidly relative to include beta, volatility, company financials, industry and others. The Future Growth and Valuation strategies are not mutually sector exposures, country exposures, and economic and market risk factors. exclusive and can both be deemed important in investment process. Market Conditions: Consideration of stock's recent price and Social Considerations: Company's ethical, environmental, and business practices as well as an evaluation of the volume history relative to the market and similar stocks as well as company's business lines in light of the current social and the overall stock market conditions. political climate. Opportunity: Unique opportunities that may exist for a small Valuation: Stocks selling cheaply compared to peer stocks number of stocks or at different points in time. May involve based on accounting ratios and valuation techniques. The combining stocks and derivatives and may involve use of Valuation and Future Growth strategies are not mutually considerable leverage. Many hedge fund managers follow this exclusive and can both be deemed an opportunity strategy, strategy, but a mutual fund manager may also be so classified. but a mutual fund manager may also be so classified. A CFA Institute Production www.cfainstitute.org Slides provided by speaker 17
Desirable Fund Characteristics • Focused strategy • Smaller funds • Limited number of stocks • Low R-squared • High tracking error • High style drift • High Active Share • Solo manager is desirable • Brand name of limited value In short, avoid closet indexers! A CFA Institute Production www.cfainstitute.org Slides provided by speaker 18
Stock and Fund Rating Process Best • Strategy Identify Funds Rank • Measure Consistency Managers Managers • Measure Conviction (Funds) Best Rank • Strategy Identify Stocks Investments • Measure Conviction Holdings (Stocks) Monthly Process (22,000 Funds and Holdings) Patented Behavioral Algorithm A CFA Institute Production www.cfainstitute.org Slides provided by speaker 19
Athena Ratings Performance Diamonds Guidance Strong Buy 5 Buy 400–600bps 4 Spread Between Hold 3 Highest and Lowest Sell Conviction 2 Strong Sell 1 Advisor Perspectives — Tom Howard “Improving on Morningstars Ratings” June 22, 2010 “Using Buy Side Analytics to Improve Stock Selection” November 16, 2010 A CFA Institute Production www.cfainstitute.org Slides provided by speaker 20
High Conviction Equity A CFA Institute Production www.cfainstitute.org Slides provided by speaker 21
Concentration and Volatility Portfolio Annual Standard Deviation (%) 50 45 40 35 30 25 20 15 10 5 0 0 5 10 15 20 25 30 35 40 Number of Stocks Assumes stock standard deviation of 45% and inter-stock correlation of 0.33. Based on Evans, J.L., and S.H. Archer (1968), Diversification and the reduction of dispersion: an empirical analysis, Journal of Finance, 23, 761–767. A CFA Institute Production www.cfainstitute.org Slides provided by speaker 22
Recommend
More recommend
