More Background
We firmly believe that the financial markets in modern developed economies are efficient.
Market efficiency is a fundamental tenet of Modern Portfolio Theory, and virtually all modern comprehensive studies of market behaviour support the notion of efficiency to a material degree. In fact, Modern Portfolio Theory is solidly backed by over 50 years of Nobel prize-winning economic research and empirical evidence.
In practical terms, the bad news about market efficiency is that it is virtually impossible for any investment manager (stockbroker, fund manager, IFA, private banker, et cetera) to consistently ‘beat the market’ over the long term by betting on individual shares or securities. In fact, the great majority of investment managers who try to beat the market end up under-performing simple market averages, mainly due to the high costs they generate. And the few managers who do outperform are unable to statistically show that their performance is due to skill rather than simple luck.
But there is also very good news about market efficiency. Encouragingly, Modern Portfolio Theory and its applications have confirmed that the most robust and intelligent investment strategy is often simple to explain and easy to understand. In particular, the research shows that over the long term, an investor’s expected return will relentlessly and inextricably be linked to the amount of structural investment risk taken. In fact, by far the two most important factors in determining long term investment results are:
- portfolio structure; and
- controlling the costs involved.
By focusing on these two important structural factors, successful long term investment strategies can be developed by applying engineering-like solutions to the investment problem.
The scientifically structured asset class funds used in our investment portfolios concentrate their investment activities on capturing the overall market return associated with each asset class. They do not try to beat the market. Rather, they invest according to specific criteria that define investments within an asset class category. They will seek (where possible) to own as many of the available investments in the target asset class. The goal is to deliver the asset class return for the period, not to try to pick winners and losers.
Formerly, institutional versions of these funds were not available to many individual investors. The reference to 'institutional' simply means that they have historically been available only to the largest investors, such as major pension funds. However, today they are increasingly available to individual investors.
By strategically structuring your portfolio using institutional versions of these funds, we aim to provide you with improved long term performance.