Investment Management Philosophy

We believe markets are efficient.  Most Wall Street investment managers practice an "active investment style," trying to pick, time - and beat - the market.  While this may seem like a logical, reasonable, and a proactive approach, it may also potentially result in costly mistakes and higher expenses.  History has demonstrated that very few active managers perform as well as their benchmark over time, yet alone exceed it.  So why are we paying all of this money in management fees and trading costs when the majority of portfolio managers provide less than market results overtime?

Our Equilibrium-Based investment philosophy is founded on exhaustive academic financial research.  We see markets as an ally, not an adversary.  Rather than trying to take advantage of the ways markets are mistaken, we help our clients attempt to take advantage of the ways markets behave.  Or stated differently, we trust in the power of competition.  Companies compete with each other for investment capital, and millions of investors compete with each other to find the most attractive returns.  This competition quickly drives prices to fair value or equilibrium, creating a situation where investors should only expect potentially larger returns if they are willing to bear greater risk.  


Eugene Fama won the Nobel Prize in Economics in 2013 for his ground breaking research on the failure of active management.

The Failure of Active Management

The efficient markets hypothesis implies that no active investor will consistently beat the market over long periods of time, except by chance. Yet active managers test the hypothesis every day through their efforts to pick stocks and time markets.  The evidence shows that their efforts are not worth the high cost borne by investors.

The following slide displays the percentage of actively managed public equity funds that failed to outperform their respective market benchmarks for each major fund category for the five-year period ending December 2012.  Most of the fund categories failed to beat their respective benchmark as a group.  This is consistent with research, which shows that, as a group, active managers underperform the market by an amount equivalent to their average fees and expenses.

 

 

Research by Economics Nobel Prize winner Eugene Fama and other financial academics has offered evidence that the bond markets are efficient and that interest rates and bond prices do not move predictably.  This appears to be the case with all types of issues, from short-term government instruments to long term corporate bonds.

This slide illustrates the formidable challenge that active bond managers face.  The graph shows the percentage of active fixed income funds in each category that failed to beat their respective market benchmark for the five-year period ending December 2012. All categories had at least a 40% failure rate, with failure defined as underperforming their benchmark.

This is consistent with financial theory and research, which propose that active managers cannot outperform the market as a group, particularly after accounting for management fees, trading costs and other expenses.

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