The active passive debate hinges on whether markets are efficient or if there are anomalies that investors can uncover and leverage. In order for markets to be efficient, the people investing in them would also have to be “efficient” – no mistakes, no emotions, perfect arbiters of risk and return. If you believe that indeed investors are not perfect and their actions may lead to dislocations and inefficiencies, then you are stepping into the realm of behavioral finance. If you wanted to invest in strategies of this nature, you might want to do so with a Nobel Prize winning economist who is the “father” of this school of thought. Enter Fuller & Thaler.
What’s the Scoop?
Founded in 1993 and managing over $8B in assets, Fuller & Thaler has been discovered by investors, but one of their mutual funds still represents an undiscovered opportunity in small cap equity.
Unlike some of their University of Chicago brethren, the team at Fuller & Thaler believes that academic theory supports the argument that markets are inefficient. The team is led by behavioral finance gurus including Dr. Richard Thaler, 2017 Nobel Prize Winner in Economics, Russell Fuller, PhD, CFA, Raife Giovinazzo, PhD, CFA and board member emeritus Dr. Daniel Kahneman, 2002 Nobel Prize Winner in Economics. Google them. Enough said.
Anne Ryan | University of Chicago via AP
In this photo provided by the University of Chicago, Richard Thaler poses for a photo with his books at home after winning the Nobel prize in economics, Monday, October 9, 2017.
The team has been built with their disciplined, behavioral process at the center, not the other way around. They believe this provides Fuller & Thaler with a distinct advantage, and is a key source of delivering sustainable alpha. While many asset managers may tout size, depth, or key personnel as being differentiators, Fuller & Thaler believes it is their unconventional approach which delivers an edge against the competition.
Their approach is non-traditional; it is not fundamental, nor is it quantitative. Their investment process is based on decades of research into behavioral finance. Behavioral finance is the study of how investors actually behave, as opposed to how they should behave, when making investment decisions. Professional investors are human, and like all humans, they make mistakes. Investors make mistakes because they have emotions, use imperfect rules-of-thumb, and have priorities beyond risk and return. Fuller & Thaler look for those mistakes, seeking to predict when other investors – the “market” – have likely made a behavioral mistake, and in turn, have created a buying opportunity.
There are two kinds of mistakes that produce buying opportunities: over-reaction and under-reaction. Other investors may over-react to bad news and losses (e.g., panic). Or they may under-react to good news (e.g., not pay attention). At the individual stock level, the team searches for events that suggest this type of investor misbehavior. If these behaviors are present, the team then researches fundamentals. In summary, if an investor mistake is likely and the company has solid fundamentals—they buy the stock.
How is the Strategy Different?
Fuller & Thaler’s flagship is the Fuller & Thaler Behavioral Small-Cap Equity Fund (FTHSX). Their approach in and of itself is a differentiator and the resulting portfolio has high active share. In other words, if you believe in active management, and you want your actively managed mutual fund to look different than its index, the Fuller Thaler team walks the walk. The strategy currently invests in 80 – 100 companies where the team believes investors (the market) have significantly under-reacted to dull or unexpected information or significantly over-reacted to vivid, emotional stories: either way the markets’ “mistake” has led to an opportunity for Fuller & Thaler and their investors.
Why Should You Care?
You may recognize the Fuller & Thaler name as the subadvisor of a well-respected mutual fund that is now owned by JP Morgan, the Undiscovered Managers Behavioral Fund. You may also recognize Dr. Thaler from his role in The Big Short (2015) where he said “The crazy thing is thinking that humans always act logically” or from one of his many books including Nudge (a favorite here at Havener Capital Partners). Thaler’s commitment to behavioral finance is evident across everything he does: in academia, on the screen, or in print, and it is this authenticity that underpins the values at Fuller & Thaler. This is a team that is 100% aligned around their philosophy. Credibility, pedigree, differentiation, and a staunch belief that active managers can still add value provide a powerful qualitative backdrop to a performance track record that is equally strong in its quantitative statistics.
Hey, Selena Gomez? Hope you got his autograph. Fuller & Thaler. High five to you.
Want to Learn More?
If you are an early adopter investor, Fuller & Thaler should be on your radar. The firm offers separately managed accounts as well as a mutual fund with institutional and investor and retirement plan share classes.
To learn more, visit their website at fullerthaler.com or give them a call at (650) 931-1500.