Our approach to developing and managing investment portfolios is predicated on certain fundamental assumptions with regard to the factors that most influence investment success; among these factors are the following:
The returns to a portfolio will be more influenced by the particular mix of investment classes than by any other single factor. Academic studies have shown that 94% of the variation of returns among institutional portfolios could be attributed to the asset allocation decision, while 4% was attributable to individual security selection, and 2% to market timing decisions. Asset class categories consist of things like money markets, bonds, domestic large company stocks, domestic small company stocks, international developed market stocks, real estate securities, and international emerging market securities, among others. When we develop your investment policy, it includes specific targets for each of these categories.
Numerous studies have demonstrated that stocks trading at low multiples of their book value per share offer higher returns in the long run. If one particular market segment is to be favored over another, therefore, it makes sense to overweight value stocks over so-called growth stocks (i.e. low price-to-book ratio stocks versus high price-to-book ratio stocks). We typically give client portfolios exposure to the broader markets supplemented by additional investments in value stocks; we never make specific allocations to growth stocks.
It has also been demonstrated that the size of a company influences its expected return, with smaller companies offering higher returns than larger companies over the long run. A well-diversified portfolio will have a significant allocation to smaller-company stocks.
Fees and Expenses
The future returns to any individual investment, or asset class, are not under our control. We can, however, exert prior control over the degree to which those returns are reduced by ongoing fees and expenses. Investments with low ongoing expense ratios, therefore, should be favored over investments with relatively high expense ratios, without regard to whether or not the investment vehicle was able to overcome its high expenses in the past.