• 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

IWI Award Winning Article: Predicting Returns Using Behavioral Market Barometers

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.

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Practice What You Preach: Strategy Consistency and Mutual Fund Performance

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.

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Active Equity: “Reports of My Death Are Greatly Exaggerated”

In our 2019 book, Return of the Active Manager, we declared that active equity management was alive and well in spite of the recent movement to index investing. We provided numerous ideas on how to improve the evaluation of investment opportunities as well as manage equity portfolios, from the perspective of behavioral finance. 

Little did we know that a new golden era of active equity would commence shortly thereafter.

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Performance Persistence Matters

As published on Advisor Perspectives January 30, 2023

Conventional wisdom has it that active investment managers, while capable of outperforming at times, are unable to generate persistent alpha. Among the studies supporting this belief was one conducted by the Wall Street Journal. Its 2017 article, The Morningstar Mirage, was based on Morningstar’s “star” ratings of active mutual funds.

Examining star ratings for nearly 11,000 funds over a 14-year period, the authors concluded: When funds picked up a fifth star for the first time during the period included in the Journal’s analysis, half of them held on to it for just three months before their performance and rating weakened… The findings were especially stark among U.S.-based domestic equity funds. Of those that merited the five-star badge, a mere 10% earned five stars for their performance over the following three years. Only 7% merited five stars for the following five years, and 6% did for 10 years.

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AthenaInvest Advisors LLC
5340 South Quebec Street, Suite 320-S
Greenwood Village, CO 80111

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