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The Original Behavioral Economist

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“I’ve been doing the behavioral stuff for 35 years. It’s the basis of investing and economics. It’s only recently that it’s been popularized by academia. They’re reconstituting something in a trivial manner.”

Michael Aronstein doesn’t mince words. The president, chief investment officer and portfolio manager of the MainStay Marketfield Fund has a good thing going in the long-short equity space, due in part to his no nonsense style and the predictable unpredictability of human behavior. And it’s paying off. The fund has five stars, $7.4 billion in AUM, has returned 8.5% annually during the past five years (outdoing 95% of its peers) and is ranked third out of 45 long-short equity funds since inception its in 2007.

Aronstein, his partner Michael Shaoul and the team of analysts look for “ideas investors are acting on that we feel are incorrect.”

“We point to things they own that they shouldn’t be, and things they’re missing that they should,” Aronstein explains. “The markets are influenced by global market trends, but the two really are different. The global macro situation causes distortions in the domestic marketplace that will eventually correct themselves.”

It might sound like a value play, but it’s really anything but. To the contrary, Aronstein looks for growth companies with good balance sheets, those that “might be in controversial industries, but are strong themselves .”

When asked for an example of where this might occur, he immediately points to government statistics, an area he’s been studying for a year and a half.

“If government was subject to Sarbanes-Oxley, the producers of these numbers would be in jail,” he says. “Statistics is the easiest place for government not to spend money, if that’s what they’re looking to do.”

“If you have a story you’re writing about the New York State Legislature that is produced by the New York State Legislature, you wouldn’t need to be too innovative. People tend to be very lazy about taking numbers at face value. They don’t realize that most statistics are an estimate of a guess. When the revisions come out, it very often puts them in the opposite camp of the original conclusions.”

Aronstein says the real value comes in giving a sense of the forces at work in the world.

“Investing is avoiding the major sinkholes that could permanently take you out. We let clients know of the theme of the decade that has matured and is now too dangerous.”

With that in mind, he advises to “short bonds all over the world. The theme that’s matured is emerging-market fixed income. It’s been the most popular product on Wall Street recently.”

He noted the credit expansion “gave him pause in 2010 and 2011,” and we’re at an even higher level of credit exposure than 2003 through 2007, the period just prior to when the markets seized.

So what does he like?

Europe — little surprise given his philosophy.

“We have 25% of the fund in Europe. The north, in particular, is doing better than anybody could have guessed.”

He cryptically concludes that there are “forces that people have come to rely on that will be unseated,” noting energy as an example.

“This unseating will be an unmitigated positive for some and inherently unstable for others. Like the old saying in golf: every swing makes somebody happy.”

Check out It’s Not Just Active and Passive, but Behavioral Finance That Best Meets Clients’ Needs on AdvisorOne.