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.