Thesis, Actions & Results

Thesis #1: Markets Are Efficient

The market efficiency concept is that all information about a security is reflected in its price. We believe there is good conceptual and empirical evidence regarding market efficiency. Numerous academic studies have examined mutual fund returns with results consistently showing that active stock picking investment managers have failed to add value after investment manager fees and investment expenses.

Thesis #2: Risk and Reward Are Related

Finance theory suggests that there is a way to beat the market: take more risk. That greater risk leads to greater reward (or greater loss) is a plausible and well known tenet, and one for which substantial empirical evidence exists.

Thesis #3: Relationship Between Costs and Investing

The equity market is the collective sum of the actions of all its participants. When someone profits, another loses by an equivalent amount. Therefore, if equity markets are efficient, on average the returns of a participant are equal to the returns of the equity market minus their collective costs. These costs include management fees, trading costs and taxes.

We find that there is substantial conceptual and empirical evidence to support our three core beliefs. These core beliefs form the basis of our philosophy and thus determine the way we act on behalf of our clients. These actions are to avoid the search for alpha, capture risk premiums and implement in an efficient manner.

Action #1: Avoid the Search for Alpha

An investor should avoid the time-consuming and resource intensive effort to find market inefficiencies or “alpha” as it is often called. We do not spend time and resources actively selecting equity securities.

Action #2: Capture Equity Risk Premiums

An investor wanting to enhance their equity returns should invest in an equity strategy that target exposures to the size and value risk premiums. Academics Fama and French (1992) empirically validated the size and value equity risk premiums. We implement investment strategies to deliver the targeted risk premiums.

Action #3: Keep Costs Low

We believe an investor should be wary of active management and instead target well understood risk premiums, as this gives one confidence that the greater returns should persist. The returns an investor ultimately sees are the returns of the risk premiums after all costs are subtracted. We focus on keeping costs low for investors.

Results

Investors should expect to receive well-designed and implemented investment strategies that seek to deliver the desired risk premiums and their associated returns with minimal cost drag.