Why this behavioural finance fund may be just what your portfolio needs

Why this “behavioural finance” fund may be just what your portfolio needs

By John De Goey on April 30, 2019
Estimated reading time: 3 minutes

By succumbing to biases—like following the herd—both investors and advisors are hampering investment returns.

Photo by James Wainscoat on Unsplash

I seldom write about specific products, but every once in a while, something comes along that makes me take notice—in a good way.

So much of the mutual-fund universe is cluttered with knock-offs and me-too versions of pre-existing ideas with one or two minor variations. As a result, there have been relatively few products that have come out in the recent past that offer truly unique value propositions.

One product that really is unlike anything else I’ve seen lately is the Purpose Behavioural Opportunities Fund. Billed as “Canada’s first behavioural finance fund,” it is available both as a mutual fund (the F Class fund code is RAM 361) and as an exchange-traded fund (the ETF ticker is BHAV). While a little more expensive than I’d like (the management fee is an identical 1% for each), the product does something that no other product in Canada does: It aims to capitalize on the growing body of evidence that many investors are their own worst enemy. What do I mean by this? Simply that we are all have biases that can lead us to make poor investing decisions. Purpose has listed some common biases on a handy mousepad that I use in my office; it implores me to ask myself:

Have you considered contrary opinions to your own? (confirmation bias)
Why do you believe the market is pricing some investments incorrectly? (overconfidence)
Have you considered why a certain investment might not work out? (causal thinking)
Are you chasing performance or a hot trend? (herding and recency bias)
Are you selling to avoid realizing a loss in another investment? (loss aversion)
Are you blaming others or external factors for poor performance? (self-attribution)

A big part of the problem, for advisors and investors alike, is that we often somehow think the quirks that the behaviouralists have uncovered apply to other people, but not to them. If there’s one thing that the research shows, it is that humans are almost universally susceptible to mental shortcuts (called “heuristics”) and oddball quirks. That means you. That means me. That means pretty much everyone.

One of the funds’ promotional tag lines is: “understanding bias is a part of risk management.” To date, there are relatively few advisors who have recommended the product, but I suspect that that’s because there are relatively few who will acknowledge that they, themselves, are susceptible to biased decision-making. Neo-classical economics is rooted in the presumption that people are utility-maximizing actors who accurately process information to reach rational decisions that make the most of their own self-interest. Accordingly, most advisors presumptively think that traditional financial screens and tests are presumptively helpful. The evidence, however, shows that that is often not the case.

Finally, we have a product in Canada that challenges the prevailing orthodoxy and sets out to find new ways of managing risk and enhancing return. The Behavioural Opportunities Fund is just over one year old now, so there’s not enough information to draw meaningful conclusions about what its performance may or may not mean. I believe this is an idea (and product) whose time has come.

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John J. De Goey, CIM, CFP, FELLOW OF FPSC™ is a registrant with Wellington-Altus Private Wealth Inc. (WAPW). WAPW is a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC). The opinions expressed herein are those of the author alone and do not necessarily reflect those of WAPW, CIPF or IIROC. Investors should seek professional financial advice regarding the appropriateness of investing in any investment strategy or security and no financial decisions should be made solely on the basis of the information and opinions contained herein. The information and opinions contained herein are subject to change without notice.