Our Investment Methodology
We have a long history managing and investing money, either for our ourselves, our clients, or for some of the most talented money managers in the world. It’s through this experience that we’ve come to form our current view on what constitutes a ‘best practice’ investment management approach.
Traditionally, investment managers strove to beat the market by taking advantage of pricing mistakes and attempting to predict the future. Over time, as the industry became better at understanding and measuring risk, it became obvious that these approaches rarely beat a market index, especially after the manager’s fees are taken out, and if they do beat the market, it was usually directly as a result of taking on over-sized risks.
Instead, we believe that the largest predictor of a portfolio’s success is based on the asset allocation, which is the division of a portfolio’s investments among asset classes to balance expected risk and reward. This has been backed by several well-known studies that show more than 90% of the variability in a portfolio’s performance over time is the result of the asset allocation. (Brinson, Hood, and Beebower (1986); Brinson, Singer, and Beebower (1991); Ibbotson and Kaplan (2000))
Our approach was further shaped by the work of Nobel Prize laureates William Sharpe and Harry Markowitz, who shaped the role of financial science through their development of Modern Portfolio Theory (“MPT”), which found that a portfolio diversified across asset classes offers the best opportunity for an investor to achieve the highest possible return for a given level of risk.
Today, with the advent of exchange-traded funds (“ETFs”), we are able to build maximally diversified portfolios that are low-cost, highly liquid, and track relevant indexes. Then, we work with clients to find out about their investment objectives and risk tolerances to identify what combination of assets will best meet their needs.