You may have heard us say that we use an Evidence Based Approach to investing, but what does this actually mean?
To us it means investing in line with academic evidence and having an investment philosophy consistent with this.
There are four principle to our philosophy:
1) Markets are broadly efficient (trying to beat the market consistently after costs is difficult)
2) Fund management costs matter (a lot)
3) Diversification is key (eggs in basket)
4) Risk and return are related (higher expected returns = higher expected risk)
Starting with 1), what is an efficient market?
To us an efficient market is one where the price of share is considered to be “fair value” (whether it is right or wrong is another story). This price is the aggregate view of all buyers and sellers of that share. Put another way, consider what you think your home is worth. Then obtain the views of 1000 other people (some Chartered Surveyors and some the general public). Do you think the average of all the opinions is likely to be closer the true value than one opinion? We think so.
This is why we believe it is so hard to consistently outperform equity markets after costs. Not because those who try are unskilled but because the sheer speed of information flow these days is reflected in share prices so quickly.
The evidence? Well there are many historic white papers on this matter but SPIVA produce up to date data and as of 31/12/2016:
- Over 5 years 74.17% of European Funds underperformed the S&P Europe 350.*
- Over 5 years 88.30% of US Funds underperformed the S&P 500.*
Now if you are half-full glass person you might say there is a 25.83% chance of picking an outperforming European Fund but how easy is it to spot the winners in advance?
Pretty difficult as it turns out. Vanguard (a key investment partner of ours) produced a white paper in April 2017 called “The case for low cost index investing” which concluded that if you invested in one of the top 20% performing UK funds for the 5 years up to December 2011 then only 25.6% of these remained in top 20% for the next five years (11/2011 – 11/2016) and 29% were in the bottom 20% or were closed. Past performance really is no guide to future returns.**
We take the responsibility of looking after our client’s money very seriously and this is why we invest their money in line with evidence and our philosophy.
Another one of our investment partners are Dimensional, their co-CEO Eduardo Repetto said:
“The money we manage is not our money – its our clients past and their future”
We wholeheartedly agree with this.
* Source : SPIVA Website – 15/06/2017
** Source : Vanguard – The case for low cost index investing – April 2017