EPIC Spotlight: Tim Riley

A method used by a University of Arkansas finance professor got Tim Riley to thinking.

Riley, a financial economist at the time with the U.S. Securities and Exchange Commission, wondered what would happen if he borrowed an idea from Alexey Malakhov, whose research includes hedge funds, and modified it to see how actively managed mutual funds perform against passively managed investments?

A common school of thought is that by hiring a money manager who draws upon research, judgment and experience when advocating certain investments, those investments will outperform the market by yielding higher returns.

But when Riley’s research revealed otherwise, CBS This Morning and The Wall Street Journal seized this news and reported his findings. As it turns out, Riley discovered, investors could save up to $200 in fees per household annually by switching from actively managed funds to those that are passive, such as funds that invest in the entire Standard & Poor’s 500 or other market indices. When money managers can charge more than 1 percent of an investor’s assets for their expertise, it can add up, Riley says.

His findings hit the media in January 2016. By the following July, Riley had left his SEC job in Washington D.C. to become assistant professor with the Department of Finance with the Sam M. Walton College of Business.

The nature of mutual funds and their management is constantly on Riley’s mind. “It’s a fun place to explore,” he says.

Riley grew up in Lexington, Kentucky, and earned his degrees and Ph.D. from the University of Kentucky. After earning his doctorate, he landed a job with the SEC, where he provided input on the structure of SEC rules and developed economic analyses of potential rules.

However, he felt a calling to work in higher education, and the University of Arkansas got his attention.

“I knew it was a good school,” Riley says. “I knew it was in Walmart country.”

When he arrived, the Ozark hills reminded him of his hometown of Lexington. An avid runner, his jogs past monuments in Washington D.C. have been replaced with scenic runs on one of the many trail systems in both Fayetteville and Northwest Arkansas. He finds the locals to be friendly and his coworkers congenial. He also enjoys sharing research with his students.

“Here, you have a good idea and you get to work on it,” he says.

One idea he has worked on, which was published in the Journal of Financial Economics, is his study regarding a common misconception about high-risk mutual funds. “The greater the risk, the higher the return, correct?” Riley asks.

Yet, his models show that low-risk funds tend to outperform those in the long run. His work has been published in other journals, including the Journal of Empirical Finance, the Journal of Fixed Income and the Journal of Investing.

So, naturally, Riley likes to unwind with a little “R and R”. That would be running and research.