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Morningstar Conference: Academics Endorse Indexing

One professor has put his theories to work at a small-cap growth fund.

CHICAGO -- A prize-winning

University of Chicago

economics professor told the

Morningstar Investment Conference

Tuesday that index funds are the way to go. "It's too hard to predict who the really good managers will be," said Professor Richard Thaler.

Thaler was one of three University of Chicago professors on a panel discussing the latest academic insights in finance. He is a proponent of a simple investing theory: Stocks that have done well will continue to do well. Though the theory violates the notion of an efficient market, studies have shown that momentum investing, not just in stocks, but in sectors, may beat the indexes.

Based on his belief that a stock that beats analyst expectations is likely to do so again, Thaler helped launch a small-cap growth fund,


Undiscovered Managers Behavioral Growth. The fund sells a stock when its earnings are in line with analysts' expectations, rather than above them.

The no-load fund, which requires a minimum $250,000 initial investment, was up 33.2% last year, but it's down 3.2% so far this year. Its top three holdings as of Jan. 31 were semiconductor supplier

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, retailer

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and software and services supplier



. Almost 40% of the fund's assets are invested in technology.

Thaler has most of his retirement money in index funds. Why start a new fund? "I was asked by UMBG to try to put together a fund which would test our theories, and I liked the opportunity to try my hand at active management. And perhaps we can profit from other people's mistakes," he said. And in today's climate, he said, he likes small-cap stocks, an area in which active managers can be justified.