The 7th annual NAAIM Wagner Award shines the spotlight on new thinking around active investment management.

While the entertainment industry’s awards season has been in full swing for the past several months, another call for awards nominees of an entirely different stripe was also announced recently.

The National Association of Active Investment Managers (NAAIM) sponsors the annual Wagner Award, a competition for research papers of academic quality that cover an innovative topic in the area of active investing. Participants in the 2015 competition have been hard at work, with submissions due March 2, 2015. The award is named for Jerry Wagner, president of Flexible Plan Investments Ltd., and one of the original founding members of NAAIM.

Now in its seventh year, the NAAIM Wagner Award is designed to expand awareness of active investment management techniques and the results of active strategies. A panel of investment professionals, selected by the Wagner Award Committee, reviews entries and awards prizes, with the author of the first place paper receiving $10,000. The criteria used in judging the papers are real-world significance to practitioners of active investing, quality of exposition, analytical rigor, and innovation in thinking and results presentation. The Wagner Award has become a truly international competition, attracting responses last year from 23 entrants from the United States, Germany, New Zealand, Canada, Malaysia, and the Netherlands.

NAAIM members are registered investment advisors who believe that active investing is better for the average investor than buy-and-hold investing. To support that position, NAAIM holds this annual competition seeking out the best active investment management solutions in the world. The competition is open to a variety of financial-services professionals, including academic faculty, researchers and graduate students, investment advisors, analysts, and other financial professionals.

“Active, or as I prefer to say, ‘tactical’ investment management, can generally avoid severe loss of capital and is what investors need more than the ‘beat the market’ investment approaches,” explains Greg Morris, chairman of the 2015 NAAIM Wagner Award Committee.

The 2014 award winner, Dave Walton of StatisTrade, authored the paper, “Know Your System!—Turning Data Mining from Bias to Benefit through System Parameter Permutation.” In his award-winning paper, Walton argues that not only does traditional trading system development lead to positively biased performance estimates, but that much valuable information is lost in the process. The result for many traders is frustration due to poor realized trading system performance that does not live up to expectations. Walton demonstrates how to leverage the optimization inherent in typical system development via a method named System Parameter Permutation (SPP) and to extract information that enables realistic contingency planning based on probabilities.

The Wagner competition has brought more than peer recognition and the financial prize to its participants. Many winners have furthered their careers or been able to expand their investment advisory business as a result of their paper submissions. Walton, for example, has developed a continuing education workshop for advisors on model and system development, based on his 2014 paper.

Three-time winner Tony Cooper used his first-place winnings in 2010 as seed money for his winning paper’s strategy. Since that time, he has grown the initial investment threefold. Along with his monetary award and its subsequent investment, Cooper has profited from winning the Wagner Award in another very tangible way: His recognition in the industry has brought him more clients who have purchased his custom software solutions.

But the truly important aspect of the competition remains its focus on advancing innovative theory and thinking in the practice of active management. The 2007-2008 credit crisis, following on the heels of the 2000-2002 decline, has led many investors to “question the wisdom of buy-and-hold investing,” explains Jerry Wagner.

With those two significant bear markets in the past 15 years—and the investment media full of contradictory articles on (a) how to “time” the market and avoid the next bear or (b) why it is “impossible to time the market”—furthering the serious understanding of active methodologies is of high importance within the investment industry. Are there new and innovative ways to profitably use active management through a portfolio of mutual funds, exchange-traded funds, stock baskets, or other investment vehicles?

Competition participants provide either a documented and justified investing approach or an exploration into the validity of active investing. Active investing topics can involve making investment decisions using technical analysis, quantitative analysis, or other rigorous methods. Papers can also address related topics such as position-sizing techniques, money-management approaches, scaling into and out of trades, exit strategies, and so on. Past winning papers have covered topics ranging from optimal momentum strategies to last year’s examination of the risks and biases in trading systems.

“Active investment management generally avoids severe loss of capital—and is more appropriate for most investors than ‘beat the market’ investment approaches.”

The ideal paper provides evidence of the validity of an active investing approach via an example of a trading system that outperforms the market by some well-accepted metric such as risk-adjusted return, annual return, or drawdowns. Examples of supporting evidence optimally include backtesting details and parameter-sensitivity analysis. Ideally, sufficient trading system detail is provided such that practitioners could replicate the approach.

Morris says, “There are a variety of successful approaches to active investment management. NAAIM seeks the innovators—those who can demonstrate not only a unique approach, but one that NAAIM members could practically apply to their own business.”

This article was co-authored by Susan Baber.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.