Citing an unnamed source familiar with the matter, Dow Jones reports the company is set to register a behavioral finance fund with the US Securities and Exchange Commission (SEC). With the pending registration, JP Morgan will be the first major investment firm to launch such a fund, according a Dow Jones report.
Fund managers who pick stocks on behavioral finance concepts believe that stock-market moves are tied to the psychology of investors, who act irrationally but in a consistent manner. The hope among them is that future stock-market fluctuations may be partly predicted by analyzing investors’ behavior.
At its most elementary level, behavioral finance can be as easy as investing in cheap companies with low price-to-earnings ratios. The thinking is that investors tend to ignore cheap stocks just as the stocks are ripe for a turnaround, just as they tend to flock to expensive stocks that are set to falter.
Using this approach, a disciple of behavioral finance might sell a stock just when a company is at its peak of popularity under the assumption that investors always flock to the best-performing stocks and drive their prices unnaturally high.
Desert of Data
Investors who want to check how the theory holds up in practice will find existing data scant. Value fund managers often use behavioral finance theories when stock picking, but it’s hard to know how much the theories contributed to their performance.
However, those with an instinct for historical performance will find these current funds that openly trade on a behavioral finance platform:
- Undiscovered Managers’ Behavioral Growth and Behavioral Value Funds
- LSV Value Equity Fund
- Cognitive Value Fund