Investment Management

Traditionally, money managers have fallen into two camps: conventional active managers or index managers.

Conventional active managers attempt to outguess the markets.  Usually reliant on an individual or small team they attempt to identify misprices in securities or rely on forecasting to select undervalued securities or time markets.  This sounds pretty good.  Unfortunately it doesn't work very well.  Active management is not only difficult, it also generates higher expenses, trading costs and risks.  In fact, about 80% of equity fund managers and nearly 90% of fixed income managers underperform their benchmarks.  

Conversely, index managers do not attempt to beat a benchmark but rather hold a basket of stocks replicating a certain market index.  Indexing is simple, very low cost and likely to give you a positive result.  We already know that indexing will beat the vast majority of active managers (see the 80% underperformance rate above).  Indexing does have some limitations though - namely restrictions on which securities can be owned and being forced to buy and sell securities at exactly the same time as other index funds.  

We believe there is a better option than conventional active management or passive indexing.  Decades of academic research have identified market factors (or dimensions) that have historically resulted in higher expected returns.  This strategy is grounded in economic theory and backed by decades of empirical research.  This research has identified three primary dimensions of higher expected returns: company size, relative price and profitability.  These dimensions are well documented in markets around the world and across different time periods. 

A portfolio that emphasizes these dimensions while incorporating the also important concepts of diversification, smart tax management, expense control and most importantly discipline allows investors to pursue higher expected returns in their portfolios and enjoy a better investment experience.