Making prudent decisions about your assets and building on what you have is key to securing your financial future. History shows that the long-term investor will be rewarded for putting their capital into the system.
How can you cut through all the noise and conflicting commentary in the media and from family and friends? What if you just want a good rate of return on your investment with a prudent level of risk and a well diversified portfolio?
Our investment process aims to give each of our clients a successful investment experience. Rather than bet and speculate we adopt a timeless investment strategy that is cost effective, academically proven and fully transparent.
We believe that markets are by and large efficient in that the markets generally get the pricing of individual stocks correct. Rather than seeking to spot and capitalize on market ‘mistakes’ we believe that an investor will be better served focusing on capturing the returns offered by the markets in all conditions.
We do not seek to predict future market movements or pick winning stocks. In fact, we believe that no one can successfully do either of these things consistently or beat the market by trying to do them. We differentiate between speculating and investing. Traditionally investors have paid fund managers to outperform the markets by predicting market movements and trying to spot and benefit from ‘mistakes’ made by the market. Too often they get it wrong and the costs of their transactions on an investor’s behalf greatly reduces the return an investor could have had by simply holding on to their portfolio and not trying to time the market. We seek to greatly reduce the unnecessary and costly risks of ”active fund management”.
If the markets weren’t efficient then a good fund manager should be able to beat them over time but in 1968 a study by Michael Jensen showed that there is no more outperformance by fund managers that we could expect by chance.* More recently, many studies have come to the same general conclusion, that when taxes, trading costs and fees are deducted from an average actively managed fund then they do not beat the markets.
Once the investor realises that market timing doesn’t work, that traditional speculative investing is costly and unlikely to succeed, then we can build them an investment portfolio, designed to generate the positive expected return owed to them by capitalism. Academic research proves that the majority of your portfolio’s growth will come from asset class investing.
Research proves that risk and return are related and that greater returns will be accompanied by increased portfolio risk. Risk can be mitigated in a portfolio by diversifying and investing in a mix of fixed income and equities. The proportions of each sector and the sub asset classes within are determined by how much return a client needs and how much risk they are prepared to take. This is where we differentiate ourselves from many advisory firms - by mapping out your financial future we can tell you how much of a return you need on your money and build a portfolio to suit.
Not all risk is worth taking and academic research has shown what risks are likely to be rewarded. Two world renowned economists, Fama and French, showed that market outperformance can be achieved by tilting the focus of an investment portfolio towards smaller stocks and value companies**. This approach will increase the risk for a client’s portfolio but the research indicates that it is risk that carries a reliable reward.
Costs are critical and returns can be greatly reduced and in some cases wiped out by high trading costs and turnover rates in a portfolio. By reducing these costs the savings will positively affect the investor’s return.
Our clients benefit from steering clear of speculation and instead investing with a proven approach based on solid economic theory and empirical evidence.
*Michael C. Jensen, “The Performance of Mutual Funds in the Period 1945-1964”. Journal of Finance 23, no. 2 (May 1968) : 389-416
**Eugene Fama and Kenneth French, “Common Risk Factors in the Returns of Stocks and Bonds”.