A Nobel Prize-Winning Theory Is Enriching a $7.5 Billion Manager

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  • ClariVest CEO shares investing theories during Oslo interview
  • Active managers are turning to behavioral theory to top market

Richard Thaler wins the Nobel Economics Prize in Stockholm on Oct. 9, 2017.

Photographer: Jonathan Nackstrand/AFP/Getty Images

Human beings tend to have biases. Knowing how to read those can make you very rich.

During a recent interview in Oslo, Stacey Nutt, the chief executive officer of asset management firm ClariVest Asset Management LLC talked about the way behavioral economics is helping his portfolio managers beat the market.

Nutt says the trick is to go for “under-appreciated fundamental trends.”

“Fundamental movement but not a lot of excitement. That’s an interesting combination for us,” he said in the Norwegian capital last week. “When there’s still, what I would call, a blanket of cynicism, that kind of resides over those trends.”

The notion that investors can beat the market has met with a good deal of skepticism of late. But some active managers are now trying to get ahead by applying behavioral finance theories such as those developed by Nobel laureates Richard Thaler (co-author of “Nudge”) and Daniel Kahneman. These asset managers try to avoid behavioral biases in their own decisions, while capitalizing on the biases of others.

Read more: Thaler Wins Nobel as Global Policy Makers Embrace ’Nudge’ Theory

San Diego-based ClariVest, which helps advise Fidelity and Nordea, has even implemented systems to nudge its portfolio managers to behave in a way that enhances returns, according to Nutt, who as CEO has $7.5 billion under management and advice.

“Our screening tools highlight sell ideas currently owned in our portfolios,” he said. “The portfolio manager is nudged to sell the stock. He’s not forced to sell it but nudged and reminded of it. Behavioral biases lead investors to hold on to losers too long, this nudge helps our PMs avoid this bias.”

ClariVest uses a mix of quantitative and qualitative tools to find investment ideas. It runs a quantitative model based on 12 to 15 fundamental and technical factors every day to find “conservatism events” -- when the market is reacting conservatively to recent strong fundamentals.

Eagle Capital Appreciation Fund, managed by Nutt, has an average annual return of 17 percent in the past five years. That’s better than 89 percent of its peers, according to data compiled by Bloomberg.

“We don’t buy best ideas,” he said. “We use the opportunity to get in early in the trends, knowing that a significant portion of the ideas we invest in will not turn out to develop into trends. We’ll get rid of them.”

A recent investment is Wal-Mart Stores, Inc., which operates in a sector that is under a lot of pressure, according to Nutt.

“We like Wal-Mart as an overlooked competitor to Amazon,” he said. “They are one of the few retailers out there with the breadth to compete with Amazon. They’ve got the distribution network, the infrastructure that is needed. They are starting to get more competitive online.”

For many other U.S. retailers it will be difficult and a question of who will survive, Nutt said

“Online is just destroying them,” he said. “It’s gonna be a rough, rough sector for quite some time.”

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