Investment Philosophy

Capitalism is what underpins the world’s economy and is overwhelmingly the most successful economic model that mankind has devised. The free market is a simple mechanism that brings together ideas for products and services, and the finance required to get them off the ground. 

People who invest in an enterprise are taking a risk with their capital and are therefore entitled to share any financial rewards - just as they should accept any losses. This simple principle is followed in every corner of the world from the dusty markets of third-world villages to the board rooms of the world’s richest corporations. In more sophisticated markets, the rules of this process are codified by formal capital markets and most investors participate through tightly regulated exchanges of shares and bonds.

We believe it is impossible to improve your investment return without taking more risk. In other words, the potential for financial loss you expose yourself to in taking a risk is also the reason you earn a return. There is good risk and bad risk and higher exposure to the right risk factors leads to higher expected returns, but is no guarantee of them. Risk is the premium investors pay for the expectation of a greater return. 

Our role as your adviser is first to identify which risks offer consistently higher expected returns and which do not, and then to offer you exposure to those risks in a structured, disciplined and cost effective way.

Diversification is the principle of spreading your investment risk around. Our investment portfolios therefore hold the shares and bonds of many companies and governments in many countries around the world. Because we believe in the power of capital markets rather than individual predictions or judgments, we are able to invest our clients’ assets in many thousands of individual investments. This means the negative and positive influence of each individual investment is reduced, producing, on aggregate, less risk in our portfolios.

If competition drives prices to fair value, one might wonder why underperformance is so common. A major factor is mutual fund costs. Costs reduce an investor’s net return and represent a hurdle for a fund. Before a fund can outperform, it must first add enough value to cover its costs. 

All mutual funds incur costs. Some costs, such as expense ratios, are easily observed, while others are more difficult to measure. The question is not whether investors must bear some costs, but whether the costs are reasonable and indicative of the value added by a fund manager’s decisions. 

Markets are frenetic, energetic, ever-changing entities that require people who are actively involved in them to be constantly plugged in and switched on. But this does not mean that as an investor you must be too. This is a mistake many investors make – believing that to be a successful investor they must have their finger on the pulse all the time. 

The investment management industry and financial press perpetuates this myth with daily chatter that offers rolling tips, predictions, warnings, speculation and advice. This material is produced by competitive media and fund sales industries that survive by attracting attention to themselves. But virtually none of this information is of use to investors; in fact, it is distracting noise that can bully people into taking ill-advised actions. It is entertainment, not information.

Our investment philosophy is based on information, not noise or entertainment. Its roots are in the work of cool-headed academics with no vested interest in selling investments or filling column inches.  

Investment styles are often categorised as active or passive. An active investor is one who makes decisions about holding one investment over another. They occupy boxes one, two and three above. Passive investors are willing to accept the market rate of return and usually enjoy paying smaller fees than active investors. 

Our investment philosophy is passive to the extent that we are not making judgments on the relative merits of one investment over another, but we are not willing to accept the market rate (less fees) for our clients. Our investment process targets market-beating performance through structured exposure to dimensions of higher expected return and uses methods of portfolio construction and implementation that enhance performance relative to the average investor.