Managed fund investors, unlike investors in directly held shares, are more likely to act rationally when making a decision to sell – holding onto their winners and selling their losers, according to a major research effort by BT Financial and the University of Western Australia (UWA).

The research is one of the most exhaustive ever undertaken anywhere in the world. It looked at transactions from 850,000 retail investors over 30 years between December 1974 and August 2005 – made possible because of BT Financial’s investor database compiled since its Australian inception in 1969. The researchers focused on differences in behaviour based on gender, age and wealth (using money invested as a proxy) because other research into direct shares has shown differences, as well as the phenomenon known as ‘disposition’ – where investors tend to sell their best-performing shares but hold onto their loss-makers, to their detriment. It has been shown that unsold losing stocks have returned an average of 5 per cent in the subsequent year, while sold winners returned a further 11.6 per cent. On average, managed fund investors, however, tend to sell their winning investments less than their losing investments, by a ratio of 0.6 compared with a ratio of 1.5 for direct shares found in an earlier study. However, there were some sub-categories of investors, it was discovered, who still showed biases towards disposition in managed fund investing. These were investors in less risky funds, wealthier investors, older investors and men more than women. While the study doesn’t speculate as to why this may be, presumably managed fund investors believe their funds managers will be making the most appropriate buy and sell decisions of the underlying stocks. However, consistent with research on direct share investing, men still transact – switching their managed funds – more frequently than women. A contradiction shown in the latest study, though, is that women have tended towards riskier investments than men, and the gap between the two becomes more apparent as the investors age. The researchers say that the influence of gender on investment behaviour is among the most robust findings in behavioural finance. In general, according to a range of studies, men are overconfident and take more risks. But in the BT/UWA study, the researchers say: “Strikingly, that data present a picture substantially at odds with what prior research leads us to expect. Gender is known for about 70 per cent of all investor-fund-days and women make up half of these. However, around 55 per cent of female investor-days are in growth funds while just over 45 per cent of male investor-days are in the same category. “The apparent greater appetite for risk shows up in the least risky fund category as well: female investors have around 18 per cent of their total investor days in the conservative category of funds while males have just under 20 per cent.” But consistent with research on direct shares, all investors tend to reduce their allocation to riskier assets as they age and that wealthier investors are more heavily weighted towards riskier assets than less wealthy investors. BT suggests that the subjects of future research should include: how performance of a portfolio is affected by disposition bias; how the disposition varies over time and market conditions, more detail on gender difference; and how regular savings plans influence the results. BT lists the Seven Deadly Sins of investing as: • Pride – holding bad investments for too long; • Lust – thinking about short-term gains; • Greed – chasing the next hot stock; • Envy – taking excessive risk to ‘keep up with the Joneses’; • Wrath – letting the fear of regret drive decisions; • Gluttony – insufficient diversification, and; • Sloth – not having a disciplined investment strategy. The latest report is to be the subject of a plenary session at the next Conference of Major Super Funds in April.

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