Eugene Fama, a senior member of the faculty at the University of Chicago Booth School of Business and widely regarded as the father of modern finance, has received the 2012 Best Perspective Award from the CFA Institute “for the timeliest and most thought-provoking opinion article.”
Fama was recognized for “An Experienced View on Markets and Investing,” which was published in the November/December issue of the Financial Analysts Journal. The article was based on a presentation Fama made at the CFA Institute’s annual conference last year. The Institute is a global association of more than 100,000 investment professionals.
During the presentation, he was critical of “active” mutual fund managers who pick individual stocks.
“After costs, only the top 3 percent of managers produce a return that indicates they have sufficient skill to just cover their costs,” said Fama, the Robert R. McCormick Distinguished Service Professor of Finance at Chicago Booth. This means “going forward, and despite extraordinary past returns, even the top performers are expected to be only about as good as a low-cost passive index fund. The other 97 percent can be expected to do worse.”
Fama’s research in theoretical and empirical work on investments, price formation in capital markets and corporate finance is well-known in both the economics and investment communities. He coined the phrase “efficient market” and the phrase gained widespread use following publication of “Efficient Capital Markets: A Review of Theory and Empirical Work,” in the Journal of Finance in 1970. The efficient market hypothesis holds that, as a result of competition, equilibrium prices in financial markets incorporate all relevant information. A famous implication of this hypothesis is that simple strategies cannot beat stock markets, bond
markets and international currency markets.
His recent work has shown that prospective stock and bond returns vary through time, and has redefined our understanding of which stocks pay greater returns than others. In addition to publishing nearly 100 academic research papers on finance, Fama has written two widely used textbooks, “The Theory of Finance” (with Merton Miller) in 1972, and “Foundations of Finance” in 1976. His work is among the most cited in all of economics and finance.
At Booth, Fama teaches “Theory of Financial Decisions,” a Ph.D. course that many M.B.A. students also take. Despite the name, the course focuses on empirical facts not theory. Many former students have described Fama’s course as their defining experience while at the school. Some former students, including David Booth, an investment fund manager, have called it a life-changing experience. In 2008, Booth made a donation valued at $300 million to the University of Chicago business school, resulting in its renaming.
Fama received the inaugural Onassis Prize in Finance, sponsored by the Onassis Public Benefit Foundation of Greece, in April 2009 in recognition of a lifetime contribution to the study of finance by a leading academic; the inaugural Morgan Stanley American Finance Association Award for Excellence in Finance in 2007; and the 2006 Nicholas Molodovsky Award from the CFA Institute, presented for “outstanding contributions to the investment profession of such significance as to change the direction of the profession and raise it to higher standards of accomplishment.”
Fama joined the Booth faculty in 1963 as he was completing his Ph.D. in economics and finance at the school.