Saints or sinners? Australian managed fund Investors Michael Parker BT Financial Group 23/11/2006

Investor bias – Saints or Sinners Logic Emotion

Investor bias – Saints or Sinners Logic Emotion

Agenda 1.Selling winners, holding losers – the costs 2.An Australian Story – Managed Funds 3.What does this mean for you

Selling winners, holding losers The ‘disposition effect’ Well known in direct equities times more likely Pleasure of Gain = Become risk averse Pain of Loss = Become risk taker Interplay of regret & over confidence Wealth Destroying behaviour

“I was determined to win back the losses. And as spring wore on I traded harder and harder, risking more and more. I was well down, but increasingly sure that my doubling up and doubling up would pay off….I redoubled my exposure” Nick Leeson, Rogue Trader: How I Brought Down Barings Bank OVERCONFIDENCE

Professor Terrance Odean, Sunday Business UK “I don’t think its about sentiment, its more about avoiding regret. After all if you hold onto a loser, you can always tell yourself it will come back everything will be okay….” REGRET AVOIDANCE

The cost of this behaviour Direct equities research Powerful downward ratchet Losers kept underperformed winners by 350 bps More active portfolios 550 bps worse off Selling winners/holding losers

Does this apply to managed fund investors? Sinners or Saints?

Agenda 1.Selling winners, holding losers – the cost 2.An Australian Story – Managed Funds 3.What does this mean for you

A major Aussie data sample Size – one of the largest of its kind in the world Breadth – longest time period studied in this field Focus – managed fund, not direct equity, investors Frequency – daily data analysis. Academic rigour – University of Western Australia

The Data 850,000 retail clients drawn from BT’s investor database December 1974 to August million daily transactions Covers 210 retail funds 50/50 split between males and females

What the research analysed Days winning AND Days losing Proportion of sales when “winning” Proportion of sales when “losing” A number >1 means winners sold faster Eliminates the fact that markets have risen

Managed Fund Saints, Direct Equity Sinners Managed fund investors are not prone to the bias, unlike direct share investors < 1 indicates No Disposition effect UNEXPECTED Direct Equities Managed Funds

Managed Fund Investors Very good at cleaning out the dead wood Very good at booting winners home Wealth Building Behaviour

Risk Factor 1 – investment profile

Growth ALL FUNDS Balanced Income Conservative Fund profile and bias Investors in conservative funds are more likely than any other type of managed fund investor to exhibit the bias. UNEXPECTED < 1 indicates NO bias

Risk factor 2 - Age

Age and bias Older investors are more likely to hold onto losing investments…until they hit retirement UNEXPECTED Increasing likelihood of wealth destroying behaviour

Risk factor 3 - Wealth

Wealth and bias Wealthier investors are more likely to exhibit the bias < 1 indicates NO bias UNEXPECTED Tax quartile

Risk Factor 4 - Gender

Gender and bias In line with accepted thinking on men’s overconfidence when it comes to investing, the research found men are more likely than women to behave badly. EXPECTED

Gender and appetite for growth We found female investors had a greater appetite for growth than male investors This becomes even more apparent with age UNEXPECTED 55.1% 45.2%

Agenda 1.Selling winners, holding losers – the cost 2.An Australian Story – Managed Funds 3.What does this mean for you

The big take outs 1.Reverse disposition effect – growth funds! 2.Gender – Women less likely to destroy wealth this way Women have a higher appetite for growth 3.Age Older not necessarily more sophisticated 4.Wealth More Income does not necessarily shield

Questions to ask yourself Do recognise any of this behaviour in me? Direct investors – educational safeguards? Pre-retirees – coaching against this bias? Older, wealthier, conservative & male Are females REALLY sensitive about financial decisions?

Summary ‘Disposition effect’ – Ratchets portfolio return down Real problem - Well researched in direct equities Australian research shows the opposite for managed funds Indentified 4 risk factors – challenge to stereotype traps

Investor bias – Saints or Sinners Logic Emotion

Disclaimers All forecasts and estimates made are based on one set of assumptions which may change. A small change in any one of the assumptions may lead to a large change in the results. The information in this document, dated November 2006, is given in good faith and has been derived from sources believed to be accurate as at this date. It is general information only and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. No company in the BT Financial Group, Westpac group of companies, nor any of their employees gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way including by reason of negligence for errors or omissions. This disclaimer is subject to any contrary provisions in the ASIC Act. This material is not to be published without the prior written consent of BT Funds Management Limited. This report is not to be regarded as a securities recommendation. Copyright January 2004 BT Funds Management Limited. This information may not be used or reproduced without the prior consent of BT Funds Management Limited. This information doesn’t account for your investment objectives, particular needs or financial situation. These should be considered before investing and we recommend you consult a financial adviser.

Wealth and bias Wealthier investors are more likely to exhibit the bias < 1 indicates NO bias UNEXPECTED Tax quartile