Biography
C. Thomas Howard is the co-founder, chief investment officer, and director of research at AthenaInvest. Building upon the Nobel Prize-winning research of Daniel Kahneman, Howard is a pioneer in the application of behavioral finance for investment management. He is a professor emeritus at the Reiman School of Finance, Daniels College of Business, University of Denver, where he taught courses and published articles in the areas of investment management and international finance. He is the author of Behavioral Portfolio Management. Howard holds a BS in mechanical engineering from the University of Idaho, an MS in management science from Oregon State University, and a PhD in finance from the University of Washington.
Most active equity funds do not underperform for lack of stock-picking skill. Rather the investment industry incentivizes them to manage business risk at the expense of long-term portfolio performance.
Is active equity poised for a new golden era?
The primary focus of the renaissance investment management firm is delivering the best possible investment performance, not on scaling for scaling’s sake, C. Thomas Howard and Jason Voss, CFA, explain in the latest entry in The Active Equity Renaissance series.
Dismantling the finance industry’s closet indexing factory is a critical step in The Active Equity Renaissance, C. Thomas Howard and Jason Voss, CFA, observe.
Jason Voss, CFA, and C. Thomas Howard have questioned many orthodoxies of modern portfolio theory (MPT). But what do they propose to take their place? Behavioral finance.
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.
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.
“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."
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?