Efficient Markets
Experience shows that even highly-experienced, highly-compensated mutual fund managers have a hard time beating the market.
In 1965, University of Chicago economics professor Eugene Fama developed The Efficient Markets Hypothesis, which states that current securities prices rapidly reflect all available information and expectations.
Also in 1965, MIT professor Paul Samuelson examined the behavior of securities prices and found that market prices are the best estimates of value and that price changes are random and unpredictable. For this work, Samuelson was awarded the Nobel Prize for Economics in 1970.
Fama’s and Samuelson’s theories suggest that active investment management cannot consistently add value through security selection and market timing. In other words: Don’t try to beat the market.
Instead…we seek to capture market rates of return by investing in large numbers of stocks in selected asset classes, resulting in portfolios with thousands of stocks.
However, unlike index funds, we don’t buy every stock in an asset class. We exclude certain groups of stocks with heightened risk or inefficiency, including new stocks (IPOs), financially distressed and bankrupt companies and illiquid stocks.
We also focus on minimizing trading costs. We own representation in the selected asset classes and hold onto them, rather than frequently buying and selling. And, as mentioned, we don’t attempt to track indexes, as this can result in significant trading costs.
Finally, our portfolio managers have flexibility on when to add or remove individual stocks from asset classes.
-
OFFICES
