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THE 2014 INVESTMENT GUIDE II
JUNE 30, 2014
JUNE 30 • 2014 EDITION
THE INVESTMENT GUIDE
STOCKS, BONDS AND FUNDS
BET AGAINST HUMAN NATURE
Behavioral finance has identified the many ways investors defeat themselves. But can it make you money?
BY JOHN F. WASIK
CONTRIBUTOR
Asset Management, which manages
more than $2 billion by using insights
from the study of investor behavior to
identify “mispriced” stocks.
Behavioral pioneers such as the
68-year-old Thaler, president-elect
of the American Economics Association, have spent decades studying how
investors often engage in self-defeating
behaviors and attempting to explain
why our brains may be hardwired to
make the wrong moves. When the
market is up, individual investors buy.
When stocks are down and they should
be buying, they run from the market, as
if fleeing a bear or saber-toothed tiger.
In short, they follow the herd, even
when the herd is heading off a cliff.
The stunning result of this buy-atthe-top and sell-at-the-bottom behavior:
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JUNE 30, 2014 FORBES
ANDY GOODWIN FOR FORBES
H
ere’s a compelling question: Can you profit
from others’ irrational
investment mistakes?
Richard H. Thaler,
a professor of behavioral science and
economics at the University of Chicago
and coauthor of the bestseller Nudge,
thinks so. He’s also a principal in San
Mateo, Calif.-based Fuller & Thaler
More than academic: Chicago prof
Richard Thaler turns research into
market-beating returns.
FORBES
THE INVESTMENT GUIDE
Over the 30 years ended Dec. 31, 2013
stock-fund investors posted an annual
return of 3.69%, compared with more
than 11% for the S&P 500, according to
Dalbar, a Boston-based financial research firm.
Much has been written about how
to get investors to stop making such
mistakes, although, as Dalbar grimly
concludes, “attempts to correct irrational investor behavior through education have proved to be futile.” But what
about the opportunities to exploit these
pervasive mistakes?
Behavioral finance flies in the face
of the efficient market hypothesis, for
which Thaler’s longtime colleague and
sometime golfing buddy Eugene Fama
won the Nobel in economics last year.
That theory holds that stock prices
incorporate all known information,
which should make it impossible to
beat the market with stock picking.
By contrast, Thaler and the behaviorists believe human error not only
leads to booms and busts but also to
inefficient pricing of individual stocks—
hence their search for undervalued
companies.
Are these guys just reinventing the
wheel? After all, legendary investors
such as John Maynard Keynes, Benjamin Graham and Warren Buffett have
been keenly aware of the need to rise
above what Keynes described as “animal spirits” and Graham dubbed “the
mood swings of Mr. Market.” Great
value investors take the long view, examining a company’s fundamentals and
prospects and looking at book value,
long-term trends, cash flow and dividends. They buy when more emotional
investors are selling and hold on when
they see future growth, even if a stock
is out of favor with the masses.
What makes the behavioral managers different, however, is that they
screen for behavior first and try to
identify value second.
One way the Fuller & Thaler money
managers spot potentially mispriced
stocks is by tracking “under- and overreaction.” Turns out that some popular
companies that may be overpriced are
not punished by investors for missing
earnings targets. Yet others, which may
be underpriced, see their stock prices
drop after they hit their targets.
Here’s another striking contrast.
Whereas Buffett looks for strong
management when deciding whether
to buy a stock or a whole company,
the analysts at Fuller & Thaler don’t
make company visits. They keep their
distance as part of the firm’s efforts to
inoculate itself against the emotional
mistakes even professional investors
make—a key one being holding on to a
pet stock too long.
“We don’t visit companies because
that’s a recipe for falling in love with
them,” Thaler explains. “We don’t think
we can create emotionless automatons,
but we can create a discipline where the
most obvious biases are eliminated.”
Not that Fuller & Thaler ignores
management’s behavior. It closely
tracks insider stock activity, Thaler
says, with “an explicit sell discipline
that looks for executive stock sales that
may tell us to sell that bugger.”
As for insider buys, they’re often a
tip-off that a company’s fortunes are
about to turn up. Fuller & Thaler has
time to act on such tips since the general investing public (behavioral economists have found) tends to underreact
to new positive news about an out-offavor company, while remembering the
old negative news.
While behavioral screens provide the
leads, Fuller & Thaler’s actual buy-andsell decisions are based on more indepth analysis by a team of four veteran
analysts who can “dig into the data [in a
way] that’s hard for a computer to do,”
says Raife Giovinazzo, a Ph.D. economist who heads up research. “We’re not
quants,” adds Giovinazzo, who studied
under both Thaler and Daniel Kahneman, who won the Nobel for his work in
behavioral economics. (Kahneman is on
the board of Fuller & Thaler.)
Giovinazzo offers this example of
how behavioral finance can inform
stock picking. Academic research
shows that people like to sell their winners—they’re four times more likely to
sell a stock that has risen 60% than one
that has been flat. But they often sell
too early because they’re psychologically “anchored” to the old price and
not taking account of new information
that may justify a new higher price.
In 2010 Home Depot’s stock rose
21% but its earnings went up 37%, and
it was consistently beating consensus earnings forecasts. After studying the chain’s improving same-store
sales, cost-cutting and worker retraining, Fuller & Thaler concluded investors had anchored on old, less positive
news. The firm overweighted Home
Depot (relative to its weight in the S&P
500) in its large-cap behavioral strategy. Good call. Home Depot returned
almost 50% in 2012, compared with
16% for the S&P.
That’s one big win. How well does
behavioral investing work overall?
Since Fuller & Thaler is a subadvisor to
mutual funds, compliance rules preclude it from commenting directly on
the performance of funds it advises. (In
an interview Thaler made clear he was
speaking about the firm’s strategies in
general, not an individual fund.)
But there’s nothing stopping
FORBES from taking a look. Fuller &
Thaler advises JPMorgan’s Undiscovered Managers Behavioral Value Fund,
which is sold to institutional investors
with a $3 million minimum investment
and to individual investors (UBVAX)
with a $1,000 minimum, a 5.25% frontend load. Morningstar considers it a
small-cap value fund.
While Fuller & Thaler is unusual, it’s
not the only firm that brands itself as a behavioral money manager. So does AthenaInvest, a firm based in Greenwood Village,
Colo. and founded by C. Thomas Howard,
a retired University of Denver professor
and author of Behavioral Portfolio Management (Harriman House, 2014).
Like Thaler, Howard eschews efficient market theory and what he
considers “emotional” measures of the
market such as standard deviation,
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FORBES JUNE 30, 2014
FORBES
THE INVESTMENT GUIDE
correlation, drawdown and Sharpe
ratio. But he takes a more quantitative
approach, using what he says are proprietary algorithms based on behavioral data to run $160 million in three
different portfolios.
Howard has received some notice
recently for the performance of his
Athena Pure Valuation Profitability
Portfolio, which had a 67.6% return in
2013, making it the next-to-top performer among the separately managed
small-cap-value accounts that Morningstar tracks. (With separately managed accounts, each investor owns
stocks directly. While such accounts
can be more tax efficient than a mutual fund, Athena’s accounts require a
$100,000 minimum investment.)
Another Athena portfolio, the Global
Tactical ETF, places sector bets; it returned 54.5% last year.
For a third portfolio, Dividend
Income Equity, Howard takes the
unusual approach of crunching data
about the behavior of mutual fund
managers (including their consistency and conviction based on relative
portfolio weights) to cherry-pick their
best ideas for high-yielding stocks. By
looking at such fund manager signals,
along with dividends, company leverage and sell-side analyst opinions,
Howard claims, he can spot out-offavor stocks that offer above-average
price gains in the future. That portfolio returned 36.7% last year, according
to Morningstar.
“We don’t try to outsmart anyone.
We just try to identify price distortions,” Howard says. F
John F. Wasik is a speaker, journalist
and the author of Keynes’s Way to Wealth:
Timeless Investment Lessons from the
Great Economist and 13 other books.
He writes regularly on personal finance
and investing for Reuters, The New York
Times and Morningstar.com
John Wasik, Contributor Bio:
I speak and write about investor protection, money management, health
economics, ecology and social issues.
My latest book is “Keynes’s Way to
Wealth,” a revealing look inside the successful portfolios of the world’s most
famous economist. All told, I’ve written
13 books including The Cul-de-Sac Syndrome and iMoney: Profitable ETF Strategies for Every Investor and write a column
for Reuters.com. I speak across the U.S.
and my writing also appears in the New
York Times, Morningstar.com and other
national publications. This blog delves
into financial and social deceptions.
From the Forbes Contributor Network and not necessarily the opinion of Forbes Media LLC.
(#82108) Excerpted and adapted with permission of Forbes Media LLC. Copyright 2014. To subscribe, please visit Forbes.com or call (800) 888-9896.
For more information about reprints from Forbes, visit PARS International Corp. at www.forbesreprints.com.
NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
This article has been printed with permission from Forbes.
The article is to be used for informational purposes only. It is not to be relied upon for legal, investment
or tax advice please speak to a financial professional for more detailed explanations.
PRINTED
COPY FOR PERSONAL READING ONLY.
This article must be distributed with the J.P. Morgan performance and disclosure pages.
NOT FOR DISTRIBUTION
REP-BehVALUE
NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
Data as of June 30, 2014
J.P. Morgan Asset Management
Undiscovered Managers Behavioral Value Fund
Performance at NAV (%)
A Shares1
Institutional Shares
Russell 2000 Value Index
Lipper Small-Cap Value Funds Index
With sales charges (%)
A Shares with 5.25% max. sales charge1
Calendar-year returns (%)
A Shares at NAV1
Russell 2000 Value Index
Lipper Small-Cap Value Funds Index
Total returns
Latest QTR
YTD
2.99
5.21
3.08
5.40
2.38
4.20
2.82
4.74
-2.42
1 yr
23.92
24.42
22.54
24.17
Average annual total returns
3 yrs
5 yrs
18.31
24.01
18.65
24.32
14.65
19.88
14.25
20.02
10 yrs
9.66
9.92
8.24
8.95
-0.32
17.42
16.20
22.68
9.07
2009
41.26
20.58
33.00
2010
31.72
24.50
25.74
2011
-1.71
-5.50
-4.82
2012
23.28
18.05
15.56
2013
37.10
34.52
35.26
The performance quoted is past performance and is not a guarantee of future results. Mutual funds are subject to certain market
risks. Investment returns and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than original cost. Current performance may be higher or lower than the performance data shown. For
performance current to the most recent month-end, please call 1-800-480-4111.
Annual operating expenses
Expense cap expiration date
Expense cap (%)
Total annual Fund operating expenses (%)
Fee waivers and/or expense reimbursements (%)2
Net expenses (%)2
A Shares
12/31/2014
1.30
2.03
(0.59)
1.44
Institutional Shares
12/31/2014
0.90
1.63
(0.59)
1.04
2The
Investment Advisor, Administrator and Distributor (the "Service Providers") have contractually agreed to waive fees and/or reimburse
expenses to the extent that Total Annual Operating Expenses (excluding Acquired Fund Fees and Expenses, dividend expenses relating to
short sales, interest, taxes, expenses related to litigation and potential litigation, extraordinary expenses and expenses related to the Board
of Trustees’ deferred compensation plan) exceed the expense cap of the average daily net assets through the expense cap expiration date.
This contract continues through that date, at which time the Service Providers will determine whether or not to renew or revise it.
Portfolio statistics
Inception date
Investment minimum
Fund number
CUSIP
A Shares
6/4/2004
$1,000
1390
904504586
Institutional Shares
12/28/1998
$3M
1368
904504842
Contact JPMorgan Distribution Services, Inc. at 1-800-480-4111 for a fund prospectus. You can also visit us at
www.jpmorganfunds.com. Investors should carefully consider the investment objectives and risks as well as charges
and expenses of the mutual fund before investing. The prospectus contains this and other information about the
mutual fund. Read the prospectus carefully before investing.
RISKS ASSOCIATED WITH INVESTING IN THE FUND:
The Fund may invest a portion of its securities in small-cap stocks. Small-capitalization funds typically carry more risk than stock funds
investing in well-established "blue-chip" companies since smaller companies generally have a higher risk of failure. Historically, smaller
companies' stock has experienced a greater degree of market volatility than the average stock.
RETURNS:
1The
quoted performance of the Fund includes performance of a predecessor fund/share class prior to the Fund's commencement of
operations. Please refer to the current prospectus for further information.
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NOT FOR DISTRIBUTION
From the commencement of operations of the Fund's Institutional Class until January 30, 2004, the Fund's investment adviser was
Undiscovered Managers, LLC. Effective January 31, 2004, J.P. Morgan Investment Management, Inc. (JPMIM) became the Fund's investment
advisor. Fuller & Thaler Asset Management, Inc. serves as the Fund's sub-advisor. The Fund is currently waiving fees. Please note the
removal of this waiver would reduce returns.
1
INDEXES DEFINED:
The Russell 2000 Value Index is an unmanaged index, which measures the performance of those Russell 2000 companies with lower priceto-book ratios and lower forecasted growth values. The performance of the index does not reflect the deduction of expenses associated with
a fund, such as investment management fees. By contrast, the performance of the Fund reflects the deduction of the fund expenses,
including sales charges if applicable. Investors can not invest directly in an index.
The performance of the Lipper Small-Cap Value Funds Index includes expenses associated with a mutual fund, such as investment
management fees. These expenses are not identical to the expenses charged by the Fund.
Total return assumes reinvestment of dividends and capital gains distributions and reflects the deduction of any sales charges, where
applicable. Performance may reflect the waiver of a portion of the Fund's advisory or administrative fees for certain periods since the
inception date. If fees had not been waived, performance would have been less favorable.
J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses
include, but are not limited to, JPMorgan Chase Bank, N.A., J.P. Morgan Investment Management Inc., Security Capital Research &
Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.
J.P. Morgan Funds are distributed by JPMorgan Distribution Services, Inc., which is an affiliate of JPMorgan Chase & Co. Affiliates of
JPMorgan Chase & Co. receive fees for providing various services to the funds. JPMorgan Distribution Services, Inc. is a member of
FINRA/SIPC.
©JPMorgan Chase & Co., July 2014
PS-UMBV
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