Asset Class Investing
The implementation of our Asset Class portfolios is based on a framework of principles that bring consistency, reliability of outcome and lower cost to our investors. Our research and implementation partners provide us with institutional pricing and trading efficiency, all of which is delivered to your portfolio.
1. Markets Work
Markets throughout the world have a history of rewarding investors for the capital they supply. Companies compete for investment capital, and millions of investors compete to find the most attractive returns. Markets quickly incorporate information from this competition into security prices.
Traditional investment approaches strive to beat the market by taking advantage of pricing “mistakes” and attempting to predict the future. Too often, these approaches prove costly and futile. Predictions go awry and managers may hold the wrong securities at the wrong time, missing the strong returns that markets can provide. Meanwhile, capital-based economies thrive—not because markets fail but because they succeed.
2. Investing VS. Speculating
The conventional approach to investing revolves around picking funds and individual shares, and then timing into and out of markets, with the objective of beating the market. There is no doubt that capital markets have a history of rewarding investors, but there is almost no evidence supporting the notion that beating or timing the market is possible on a consistent basis.
The futility of speculation is good news for the rational investor. It means prices for securities are fair and that portfolio structure, not mispricing, explains differences in average returns. It is certainly possible to outperform markets, but not without balancing risks and costs against expected returns.
Financial research identifies the sources of investment returns. We provide the discipline, portfolio structure and the experience to target these sources and help investors achieve their goals.
3. Risks worth taking
Evidence from investors and academics alike, points to an undeniable conclusion: Risk and return are related.
Some risks are worth taking and some aren’t. Gain is rarely accomplished without taking a chance, but not all risks carry a reliable reward. Financial science over the last fifty years has brought us to a powerful understanding of the risks that are worth taking and the risks that are not.
Most investors need or want their portfolio to grow, and share markets all around the world have a long history of growth. This is simply because the businesses that make up the share market are productive growing businesses that over time deliver better results for their shareholders. Investing in sound businesses for the long term is a risk worth taking.
4. Investment dimensions
A market dimension is a factor that explains differences in returns, demonstrates persistence through time and pervasiveness across markets, and is cost-effective to capture in diversified portfolios. These dimensions increase our confidence that returns observed in historical data may appear in the future. From capital markets research over the past fifty years, we have gained a powerful understanding of the dimensions that generate higher expected returns.
Much of what we have learned can be summarised in simple terms: First, shares have higher expected returns than fixed interest. Relative performance among shares largely depends on company size (small vs. large), relative price (value vs. growth), and profitability (high vs. low).
When setting prices, markets effectively apply different discount rates to shares to reflect differences in underlying risk. Company size, relative price, and profitability are the dimensions—that allow us to identify differences in these discount rates.
In fixed interest, two dimensions largely drive relative performance: term and credit. Longer-term bonds are more sensitive than shorter-term bonds to unexpected changes in interest rates. Bonds with lower credit quality have a greater risk of default than bonds with higher credit quality.
Asset allocation is by far the most effective way of managing risk and capturing returns. By considering how much of each share market dimension to target, investors can adjust the total expected return profile of their portfolios and more easily build a strategy to support their investment goals.
5. Structure is the strategy
Successful investing means not only targeting dimensions that generate higher expected returns, but also managing risks that may needlessly compromise performance.
Avoidable risks include holding too few securities, acting on market predictions in areas like interest rate movements, and relying solely on information from third-party analysts or rating services. To all these risks, diversification is an essential countermeasure. It lessens the impact of the random fortunes tied to individual securities and positions an investor to participate in the returns of broad economic forces.
6. Implementation can make all the difference
Research and structure are the foundations of Asset Class investing. But long-term results depend on our ability to effectively implement strategies in competitive markets. Implementation has two vital and integrated functions: portfolio management and trading.
At Capital Partners we work alongside Dimensional Fund Advisors to implement our portfolios. Our focus is to achieve consistent, broadly diversified exposure to the dimensions of higher expected returns while balancing risks, costs, and other trade-offs that arise when pursuing those dimensions. Our team works continually to keep strategies in line with their objectives.
In partnership with Dimensional, the trading infrastructure available to Capital Partners’ clients provides an opportunistic approach to trading. Multiple trading desks around the world give us a formidable presence in financial markets, and such large scale results in cost-effective and lucrative trades on behalf of Capital Partners’ clients.
The result: performance driven by a potent combination of philosophy, evidence, process, and execution.