One modern portfolio theory (MPT) pillar that is unquestionably broken is the use of volatility, specifically standard deviation, as a measure of risk, Jason Voss, CFA, and C. Thomas Howard write in the latest edition of The Active Equity Renaissance series. This initial error in MPT's development is a major contributor to active investment management underperformance...
“I know you are afraid and you should be afraid. I will invest you in products that will not stir up your fears." This sentiment is applied over and over again in the investment industry in one form or another, by the "Cult of Emotion..."
Why do most active equity mutual funds underperform? The common perception is that active funds lag due to poor stock-picking skills and high management fees. Not according to Dr. Howard. His research shows that active equity funds can be evaluated based on behavioral concepts and that specific behavioral criteria such as strategy, consistency and conviction are predictive of superior performance...
After the dust settles, virtually nothing of modern portfolio theory (MPT) will remain, asserts C. Thomas Howard and Jason Voss, CFA. The three pillars on which MPT rests have been toppled, and it is time to move on. There is an alternative way to view securities markets, their movements, and their participants: behavioral finance...
Collectively, active equity delivers no value to its investors and, in fact, extracts value from them. So what can be done to launch an active equity renaissance?
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