Behavioural finance attempts to explain why people make irrational financial decisions. Some fund managers, such as Ghosh, apply aspects of behavioural finance to portfolio management.
Ghosh, who is part of a seven-member team based in Singapore and San Diego, said he uses a proprietary quant system that is able to measure behavioural biases.
According to him, the method quantitatively measures a company’s true worth as well as biases coming from retail and institutional investors, sell-side analysts and company management.
He declined to provide details about how investor biases are measured. However, he did give an example of how the behavioural component works to measure sell side biases. The system, he said, uses data to determine whether a sell-side analyst’s estimates are driven by high conviction or if the analyst is “herding” with the consensus.
Herding has become a common practice among sell-side analysts, he said. “It goes back to the behaviour where human beings hate to be wrong and be left alone in the crowd. It is ok to be wrong − so long as we are wrong with everybody else,” he said.
Given that, the system would put less value on analysts that exhibit herding behaviour and more on those who have clear conviction in their equity estimates.
The system updates the investment team every morning, according to Ghosh. He noted that although the system is automated, the team conducts a “smell test” after it gets morning updates to make sure that the numbers make sense.
In addition, the team could also override the system in two instances: if a company suddenly has breaking news or if a company has information that the system does not understand – such as a possible accounting irregularity.
Ghosh noted that overrides only represent around 5% of the total trades in a given year and that they are always risk reducing actions.
Standard Life Investments also makes use of behavioural psychology. Andrew Paisley, manager of the firm’s European Smaller Companies Fund, said it plays a role in his investment strategy by helping to find opportunities in European small cap equities, FSA reported earlier.
Use across srategies
Allianz’ behavioural finance model is used for six strategies that the team manages: emerging markets, EM consumer, EM small cap, US small cap, small cap growth and global small cap, according to Ghosh.
He declined to name the specific funds but said some of the products, such as the emerging markets strategy, are available for retail sale in various markets in Asia. The EM strategy aims to provide periodic income by finding opportunities in both dividends and capital appreciation.
Ghosh emphasised the role of dividends in emerging markets. According to him, over a 30-year period, emerging market equities that provide dividends have a cumulative return of around 1,700%, with 900% of the returns from dividends and 700% from stock price appreciation.
“So you can ignore EM dividends at your own peril.”
According to FE, Ghosh manages the Allianz GEM Equity High Dividend Fund, which is available for sale in Hong Kong, Korea, Singapore, Taiwan and Macau. He has been manager of the fund since June 2015.
The three-year performance of the GEM Equity High Dividend Fund versus its benchmark, according to FE data.
