Our Approach

Our Investment Process │ Our Investment Philosophy

Evidence Based Investment Philosophy

Our investment philosophy is rooted in decades of peer-reviewed, academic research from some of the leading financial economists in the world. The essence of our philosophy is that global asset markets are efficient and that passive, not active, low-cost investing is perhaps the most effective way of achieving superior long-term performance. We, therefore, avoid the anxiety and cost of timing markets and picking stocks, instead focusing on the factors that investors can actually control: avoiding costs, minimizing taxes and optimally gaining exposure to the attractive, long-term returns that efficient capital markets provide. - Joshua B. Angell, CIO

Many investors in the public securities markets get caught up trying to identify the next best stock or the latest market trend. These actions, however, have been shown to be extremely costly for an investor. Markets are efficient and consistently beating them by identifying mispriced securities or timing markets is extremely difficult to do. We, therefore, help investors avoid the costly mistakes of trading in and out of markets, instead focusing on the nearly 60 years of published, peer-reviewed, academic evidence showing how investors can actually enhance portfolio performance by simply capturing the returns efficient markets provide. This approach to investing - which we term evidence-based investing - is, in our view, a much better way of achieving long-term financial success.

• Evidence Based Investing (EBI) While there are many facets of our evidence based approach to investing, the core tenets of our investment philosophy can be summarized as follows:

  • Markets Are Efficient. We believe that markets are, in large part, efficient. Practically speaking, this means that asset prices reflect all publicly available information at any given moment in time. Numerous academic studies have supported the notion that capital markets are highly competitive, and that information is rapidly incorporated into asset prices such that prices almost instantaneously reflect "fair value." Fair prices mean that investors cannot consistently outperform markets without taking on additional risk. The good news, however, is that this ensures that investors are rewarded for the risks that they are willing to bear. Therefore, unlike many in the financial services industry who focus on timing markets and/or picking stocks, we, instead, focus on how to optimally harvest the long-term returns that efficient capital markets provide.

  • Risks Drive Expected Returns. We believe that risk drives expected returns. What this means is that distinct asset classes have distinct risk-return profiles; that is, investors are rewarded for the risks that they are willing to assume. Historically, returns across global markets have been driven by seven primary risk factors: market, size, value, momentum, profitability/quality, term and credit. These global risk factors explain the significant majority (typically in excess of 95%) of a diversified portfolio's variation and return. Fortunately, investors can control the expected returns of their portfolios by simply adjusting their exposure (allocations) to these seven risk factors. Our optimal portfolio management strategies recognize this simple concept, and help investors gain exposure to these risk factors in efficient ways. By systematically adjusting risk factor exposures, and focusing on the sources of return, we believe that investors gain more control over their portfolio allocation decision and improve their chances of long-term success, while also minimizing costs and taxes. 

  • Optimal Factor Exposures Enhance Returns. We believe that investors can enhance portfolio performance by tilting their portfolios to the risk factors that have best rewarded investors over time. There is abundant academic evidence, for example, showing that small-cap stocks have generated higher long-term returns than large-cap stocks; that value stocks have outperformed growth stocks; and that positive momentum stocks have outperformed negative momentum stocks. Similarly, academic research has demonstrated that short-term bonds have typically earned higher risk-adjusted returns than long-term bonds, and credit risk (i.e. the returns of corporate bonds in excess of treasuries bonds) has historically provided less than adequate compensation on a risk-adjusted basis. Accordingly, we typically seek to outperform markets, not by picking individual stocks or bonds, but by titling - in an efficient and low-cost manner - our client's investment portfolios to the risk factors that have most effectively compensated investors over time. By combining efficient portfolio tilts, and using use low-cost mutual funds with proper factor exposure, we give our clients the best chances of generating returns equal to or better than the overall market. 

  • Smart Diversification is Key. We believe that smart diversification is an essential part of a prudent investment plan. Smart diversification seeks to diversify across risk factors in a way that balances a portfolio's risk exposure to each of the market's different risk factors. Academic evidence has demonstrated that smart diversification can significantly improve a portfolio's performance. By combining low-correlating assets together, the risk of a portfolio can actually be reduced. We believe in diversification because it is not possible to consistently predict which risk factors will outperform during different economic environments. Therefore, we attempt to diversify portfolios across risk factor exposures in a way that provides approximately equal exposure to the market's different sources of risk. Unlike traditional portfolio management, however, we look beyond mere asset class titles (stocks vs. bonds) instead focusing on the asset's underlying sources of risk. We attempt to diversify broadly across risk factors by holding a mix of U.S., international developed, and emerging market stocks; tilting portfolios towards, value, small size, momentum, and quality/profitability factors; allocating assets to high-quality short-term fixed income; and holding limited amounts of alternative investments - such as real estate, commodities and market-neutral portfolios. 

If you would like to learn more about our evidenced based approach to investing, please contact us today.

• Efficient Portfolio Structure. Our evidence based approach to investing is implemented and further enhanced through efficient portfolio structures. We construct efficient portfolios using the following principles:  

  • We use low-cost, evidence-based funds to implement the stock allocation: We are big believers that costs matter and that investors should avoid using actively managed funds where an individual person or management team attempts to outperform the market. Accordingly, we use low-cost, passively managed mutual funds that try to efficiently capture the dimensions of equity returns as identified by decades' worth of academic research. These funds, unlike traditional index funds, seek to optimally gain exposure to the market's underlying risk factors (not just the constituents of a defined benchmark index) and employ several rules-based trading parameters to enhance returns relative to an index fund (such as minimizing trading costs when the components of an index are reconstituted). More importantly, these funds are rules-based and not reliant on an individual person or management team's beliefs about the overall market or an individual stock's relative valuation. 

  • We use either low-cost bond funds or individual bonds to implement the fixed income allocation: Depending on the size of an investor's total fixed income portfolio, we construct the fixed income component of a portfolio using either low cost, passively managed bond funds or individual bonds. The bond funds we utilize are structured to optimally gain passive exposure to the dimensions of bond returns as identified by decades' worth of academic research. Similarly, the individual bonds we purchase are cost-effectively structured to gain exposure to the risk factors driving bond returns. Neither we nor the bond fund managers we utilize seek to identify mispriced bonds or make bets on the direction of interest rates or the shape of the yield curve. We simply don't believe that these active management strategies are very beneficial in a wealth management context relative to the primary role that the fixed income component of a portfolio should play: namely, to reduce equity risk, diversify the overall portfolio, and/or provide a stable source of income. 

  • We may use alternative strategies for a modest portion of the overall portfolio: Academic evidence has uncovered the benefits that some alternative strategies can add by either enhancing portfolio diversification or improving expected return. These alternatives typically include commodities, real estate, managed futures, market-neutral style premium strategies, and other alternative strategies that have low, or negative correlation with other segments of the portfolio. We typically hold our alternative strategies in mutual fund form, which we believe enhances liquidity for our clients. We recommend modest allocations to these strategies, depending upon tax considerations, fees, and the correlation alternatives have to other assets in a client's portfolio.

  • We use strategic asset location to improve after-tax returns: Investors care about returns after taxes. Therefore, we always seek to locate investments in the tax-efficient manner first. Typically, we first allocate tax inefficient assets (such as bonds, real estate, and certain alternative investments) to tax deferred accounts, with more tax efficient assets (such as stocks or non-taxable bonds) allocated to taxable accounts. We believe that efficiently locating assets in the proper account can substantially improve long-term after-tax performance.

  • We look for other ways to improve the tax efficiency of your portfolio through the use of core funds, tax-managed funds and municipal bonds when appropriate: In addition to locating assets tax efficiently, we look for other ways to improve the tax efficiency of client accounts. For example,  we may use tax-managed funds and/or municipal bonds in taxable accounts. Tax-managed funds are mutual funds that explicitly look to harvest capital losses and defer gains to improve tax efficiency. In addition, we periodically monitor portfolios throughout the year for tax-loss harvesting opportunities.

If you would like to learn more about our efficient portfolio structures, please contact us today.