Our Investment Philosophy
- Investment decisions should be led by evidence, not tactics or gut feeling
- We will keep our approach simple, to control and minimise costs wherever possible
- Passive investments are demonstrably more consistent than active ones and outperform them over the medium to long term
- Hedge funds, structured products, shorting markets and other ‘alternative’ tactics should be avoided
- We do not believe in adviser-led portfolio picking – this only increases risk
- Guarantees can add significant cost but often, offer little value
- Markets are broadly efficient
- Use a solution that is independent of pressures within the fund management world
The evidence we use is the product of many decades of independent, peer-reviewed research and analysis by some of the world’s leading academics, including numerous Nobel laureates.
In other areas of life, medicine or law for example, decisions are routinely based on evidence, yet much of the investment industry ignores academic research. They rely instead on a blinkered belief that armed with enough information, sophisticated software and the smartest minds, they can beat the market and be well paid for their efforts.
An evidence-based investor has science on their side, giving them peace of mind and over time, higher expected returns.
Unlike many investment solutions, Belmayne is not constrained by an allegiance to specific academics or product providers. We use only best-in-class funds, giving exposure to markets at the lowest possible price and improve our portfolios, as better suited or more cost-effective funds become available.
Since the early 1960s, the academic community has been on a quest to uncover the secrets of investing – the characteristics of stocks and other securities that both explain performance and provide premiums above market returns. These so-called factors are simply properties common to a broad set of securities and are a quantitative way of expressing a qualitative theme. Contrary to popular belief, it is the exposure to these factors and not fund management skill, that determines performance.
The fund management industry is constantly telling us we need to invest in actively managed funds to ‘beat the market’.
Unfortunately, evidence shows that, after costs, only a tiny proportion of fund managers succeed in beating their benchmark index in the long term (around 1%). Likewise, there is no reliable way to identify in advance the few actively-managed funds that are going to outperform. It takes 22 years of data to be 90% certain these managers are genuinely skilful, not just lucky.
When capital and labour are put to efficient use, with the aim of generating the maximum wealth for those who take on the risk of enterprise, it is assumed free markets price financial assets effectively and fairly, based on supply and demand.
It is accepted that the UK and other developed nations, in which clients may invest, are broadly capitalist societies, where profits are ultimately expected to flow through to owners.
While this may not be the case for a small number of companies (the collapse of Enron, WorldCom, Lehman Brothers, Woolworths and Carillion left shareholders nursing large losses) or some emerging market economies, it is a fair description and expectation.
Risk and reward go hand in hand
A basic underlying assumption is that to achieve a higher level of return, an investor needs to assume a higher level of risk.
Don’t put your eggs in one basket
Diversification is a risk management technique that mixes a wide variety of investments, covering multiple asset classes and with no bias to a specific industry or segment.
The only certainty in financial markets is uncertainty, which requires an astute investor to take advantage of the diversification benefits available.
The portfolios we use are highly diversified across 23 developed and 24 emerging market countries, as well as more than 20,000 individual equities and bonds. This increases the opportunity to capture the benefits provided by capitalism around the world.
We focus on minimising costs in the widest sense. We avoid the cost of underperformance by an active manager, use low-cost passive strategies, negotiate service provider discounts and manage investments in a tax aware manner, via the portfolio management service.
While investment costs might seem relatively small, they all add up. The power of compounding means you not only lose the amount you pay in fees, but also the growth that money might have made for years to come.
Numerous studies in the past 60 years have shown successful tactical asset allocation, otherwise known as market timing, is incredibly difficult.
In 1986, landmark research showed that asset allocation was the overwhelmingly dominant contributor (91.5%) to the total returns of an investment portfolio. Choosing the right stocks or mutual funds was not the main factor (4.6%), while market timing played an even smaller part (1.8%).
Trying to judge when a bear or bull market is about to start/end or when one asset class will perform better than another is futile. To repeatedly succeed at this, net of the costs incurred by buying and selling securities, is nigh on impossible. Investors, including the professionals, typically harm their returns by trading on these sorts of market calls. Research available on the S&P Indices Versus Active (SPIVA) website repeatedly demonstrates this year in, year out.
Many investment managers who claim to be passive, simply by virtue of the fact they use index funds, are in fact making active investment decisions. Typically, for example, their portfolios have a tactical asset allocation overlay. Regardless of whether you invest via index funds, active funds or individual shares, there is no reliable evidence that tactical asset allocation will deliver higher returns.
Based on this evidence, we employ a buy-and-hold policy, only trading to maintain strategic asset allocation within pre-set tolerance bands, or to replace funds with lower cost alternatives. From time to time, we may look to incorporate new funds to gain exposure to a new factor, but all in all, these activities lead to very little trading, reducing transaction costs and thus enhancing returns for investors.
These portfolios are built around a core of ultra-low cost index tracker funds that provide access to most of the world’s publicly available equities and bonds – the kind active fund managers have repeatedly been shown to struggle to beat.
Core index tracker funds are typically sourced via the world’s largest asset managers, who have the economies of scale to drive prices down to levels that most fund managers could not achieve. Vanguard and iShares, the two largest asset managers in the world with $9.4 trillion of assets under management between them, feature heavily in the portfolios.
Index tracker funds typically aim to replicate a benchmark index. In their most efficient form, they track a complete index such as the MSCI Emerging Markets Index or FTSE All Share Index. They can do this with incredible accuracy and for very low cost – as little as 0.05% per annum.
In addition to these ‘core’ funds, additional funds are included to gain access to various factors. Often, index tracker funds can be used to facilitate this, but there is an argument that says simply tracking an index, is not the most efficient way to gain exposure to a particular factor. For instance, with small cap stocks, there may be a good reason not to buy certain stocks on any given day – they may be in short supply and to obtain them (to match the index you are tracking) you may have to pay a sizeable premium.
Dimensional Fund Advisors have been a pioneer since the early eighties in running funds that look to capture factors. They do so by not simply replicating an index, but by employing trading rules that avoid the potential high costs and inefficiencies of clinical benchmark tracking.