Many financial service firms offer an approach based on “active management.” Active management assumes that the markets are generally inefficient, allowing clever individuals to regularly exploit and profit from the anomalies. And yet, there is overwhelming academic evidence that the collective wisdom of all market players – especially in today’s electronic era – results in highly efficient markets. Markets reflect fair pricing almost instantaneously upon release of any good or bad price-related news.
We heed this academic wisdom and offer an “evidence-based management” approach. Experience tells us that the opportunities to exploit market inefficiencies are too few and far between to effectively and affordably pursue. We advise investing in ways that enable broad diversity, low costs and appropriate levels of risk. Years of peer-reviewed research demonstrate this to be the most effective way to capture market returns. By valuing evidence over emotion and academic research over often-changing opinions, the evidenced-based approach can yield these benefits.
- By holding entire market components, one maximizes the benefits of diversification.
- By “tilting” the portfolio to riskier or less risky components, the investor can expect to capture the highest market return given his or her risk tolerance.
- The investor maintains control over his or her own portfolio’s components (by avoiding active funds’ tendency to style drift without the investor’s knowledge).
- Expenses can be minimized.
- Tax efficiency can be maximized.