Markets are driven by emotions such as fear and greed, but acting on these is rarely the right move, according to Citywire AA-rated Michael Barakos.
Barakos, who runs several funds at JPM including the Europe Strategic Growth fund, said although risk is part and parcel of investing, investors too often allow their emotions to drive their decisions. This causes them to buy high and sell low, which results in underperformance against the market.
‘There is a huge body of evidence from cognitive psychological surveys and experiments that show humans over-estimate their own abilities on both an absolute and relative basis,’ he said.
Being aware of behavioural biases has helped improve decision making affecting the various funds he runs, Barakos explained in an investor update, and this has been brought into sharp focus following the Brexit vote.
'Across all funds and our behavioural finance process generally, we continue to closely monitor risk. We expect volatility to continue as exit negotiations may be protracted,' Barakos said.
‘In the Europe Strategic Growth fund we’ve been generally underweight in banks, insurance and media sectors, and we’ve rotated from companies with exposure to the domestic UK economy more towards names exposed internationally, such as in the food, beverage and tobacco sector.’
Barakos has 24% of the fund allocated to the UK and its top 10 holdings include Nestle (3.9%) British American Tobacco (3%) and Unilever (3.5%).
‘In the Europe Strategic Dividend fund we have tilted more towards large cap international names.’ This includes a 2.8% holding in Royal Dutch Shell and a 1.7% holding in healthcare giant GlaxoSmithKline.
‘In the Europe Strategic Value fund, we’ve remained underweight the UK relative to our benchmark but have focused on UK names that are more internationally focused.’
Barakos believes that behavioural biases such as over-confidence lie behind a number of persistent market anomalies such as the valuation anomaly, where cheap stocks tend to outperform expensive stocks over the long term.
‘Over-confidence tends to lead to over-trading: humans tend to be very slow to accept that they are wrong. This is especially true when ego and pride are strong behavioural traits and can be exacerbated by other behavioural biases such as the endowment effect and regret aversion.’