• Research and data-driven behavioral insights to guide client conversations

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

  • Ideas, guides and materials designed to differentiate and grow your practice

  • Current market conditions from the Behavioral, Economic, Valuation, and Technical perspectives

The Best Strategies for Building Wealth

One of the underappreciated aspects of active management is the ability to build a well-curated portfolio of mutual funds that pursue unique investment strategies. The chart below shows the aggregate performance of ten active US equity strategies over the last thirty-eight years. Allocating to the top strategies and avoiding the bottom strategies can dramatically improve long-term performance.

COMPOUND ANNUAL INVESTMENT STRATEGY RETURNS (1980 - 2018)

Strategy Performance 2019 11

Source: AthenaInvest, Inc.

Investment strategy is the way portfolio managers go about buying and selling securities to generate returns. For active equity mutual funds, this process is described in the fund’s prospectus under the heading “Principal Investment Strategies.” Each of the groups of managers above focus on different criteria. For example, Future Growth managers want to identify companies that are poised to grow revenues and earnings into the foreseeable future. Profitability managers, on the other hand, are looking for companies that generate large cash flows, pay dividends, and operate to deliver maximum cash back to shareholders. Most of the companies that are attractive to Future Growth managers would not look good to Profitability managers and vice-versa. For more information about AthenaInvest’ s Strategy Framework, see www.athenainvest.com/strategy-summary.

As the chart above shows, not all investment strategies are created equal. The best-performing strategy over time has been Future Growth, which has outperformed the worst-performing strategy, Risk, by nearly 6% per year. But different strategies do well at different times, which is why it makes sense to diversify among the top six performing strategies in a long-term growth portfolio. Knowing what strategies do better over the long-term can also help investors stay allocated to them in periods of underperformance.

From the Behavioral Viewpoint

What is going on?

  1. Investors use Heuristics to simplify complex decisions, like selecting an active equity mutual fund. It is easy to rely on a fund’s name or broad category along with recent trailing performance to select a “good” fund. It is more difficult to take the time to learn how the mutual fund invests your capital.

  2. Availability Bias and Social Validation lead investors to chase recent performance and allocate away from their strategic allocation. It is difficult to stay invested in valuation-oriented strategies when future growth and tech stocks garner most of the public’s attention.

  3. With Fallacy of Control and Overconfidence Bias, we conclude that we know what to do. We take control and start managing our own investments based on short-term performance.

What can we do?

  1. Diversify by investment strategy to benefit from different ways of generating returns. Remember strategies and managers do well at different times and in different market conditions.

  2. Take time to understand each investment strategy. This information will help address important process questions such as how managers invest and how market conditions may impact them.

  3. Give investments a full market cycle to perform. Evaluate managers on how consistently they stay true to their investment strategy rather than on short-term performance metrics.

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IMPORTANT INFORMATION AND DISCLOSURES

The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product.  There can be no assurance that future recommendations will achieve comparable results.  The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.  AthenaInvest disclaims any responsibility to update such views.  These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any AthenaInvest.

You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives and financial circumstances.  You should consult with a qualified financial adviser, legal or tax professional regarding your specific situation.  Investments involve risk and unless otherwise stated, are not guaranteed. Past performance is not indicative of future performance.

ABA-2019-11

Contact

AthenaInvest Advisors LLC
5340 South Quebec Street, Suite 365-N
Greenwood Village, CO 80111

Phone:   (877) 430-5675
Fax:        (303) 721-6294
Email:     support@athenainvest.com