How to make money out of manager biases

All managers are aware of the behavioural biases that most investors exhibit and how to bet against them. Not many, though, concentrate their whole philosophy on those biases. ClariVest Asset Management, however, does so and with considerable success.

ClariVest, which is a US-based boutique that started in 2006, focuses on the interaction between a company’s changing fundamentals and investor behaviour towards it. The firm watches other fund managers as much as it watches the stocks.

One of the big biases of fund managers, for instance, is conservatism. ClariVest says that conservatism – which could also be thought of as a fund manager’s own career risk – tends to collide with naturally occurring fundamental cycles. This results in an aggregate market inefficiency across large numbers of analysts and the stocks they research.

In the past year, to March 31, the approach has meant an earnings-per-share growth of 12.7 per cent for ClariVest’s portfolio versus the MSCI World’s figure of 3.4 per cent. Over five years the numbers are 8.3 per cent for the ClariVest portfolio and 7.1 per cent for the MSCI. Maybe behavioural biases are becoming more pronounced.

Stacey Nutt, the CIO and co-founder of ClariVest, whose investment team actually dates back to 2000 in a previous incarnation, said on a visit to Australia last week that the “behavioural approach” the firm used identified entry and exit points for stocks.

“All things cycle,” he said. “And all cycles end badly. We have been managing money this way for a long time. We have been together for about 20 years … We look at other fund managers’ conservatism and see how we can make money out of it.”

ClariVest appointed its Australian representative, Mike Stewart of Introvest, a third-party marketing business, in January last year. He said ClariInvest had already won an Australian-sourced emerging market mandate and was being very well received around the industry.

Nutt said that, overall, stock analysts tended to be optimistic. However, there was always “pockets” of analysts who tended to react conservatively to stock news.

“We look at those analysts’ conservatism and then we see how we can make money out of it,” he said. “We look at how they are trying to predict the future… If you act conservatively there’s no problem from the perspective of your own career. An error of omission doesn’t cost you as much as an error of commission… The bottom of the market is zero, but there is no top to it. That’s an asymmetry.”