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David Dierking Nov 21, 2017
With investors always looking for a way to beat the market, can behavioral finance-oriented funds help? Let us find out.
In case you are wondering whether mutual funds are right for you at all, you should read why mutual funds, in general, should be a part of your portfolio.
Behavioral finance shows up in contrarian strategies, such as the Fidelity Contrafund (FCNTX), which look for companies whose value the manager believes are not fully recognized by the public. Momentum funds, such as the AQR Large Cap Momentum Fund (AMOMX), try to exploit the fact that investors like to buy stocks that are showing an upward price trend.
The authors of this 2013 study about the performance of behavioral funds found that, while they outperform active funds in general, they failed to deliver superior risk-adjusted returns. A second study, also from 2013, came to a similar conclusion, finding that there is no evidence of outperformance by behavioral funds on a risk-adjusted basis. The group of 22 funds examined delivered less alpha, as measured by the Sharpe ratio and Treynor ratio, than the broader market, while exhibiting greater risk. Moreover, behavioral funds also failed to produce superior returns around the time of the financial crisis, when opportunities to exploit mispricings should have been at their greatest.
Learn more about why investors are fleeing actively managed funds.
The J.P. Morgan Intrepid Value Fund (JIVAX) is another example of a behavioral fund, which focuses on value, quality and momentum factors to drive returns. It has been a relatively average performer over its life, earning a 3-star rating from Morningstar.
Check out this article that dispels some of the myths surrounding active management.
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