Research shows that almost 80% of active fund managers underperform their benchmarks. For many people, the solution is to simply purchase index funds which eliminates the risk of underperformance.
But is there another option?
Let’s imagine that you are swimming in the ocean above a school of fish. An active investment manager may look down and try to pick the fish that will swim the fastest. A variety of factors may go into this pick. The active manager may choose the fish that is largest, or one with an extra gill. The manager may pick the correct fish to finish first. However, historically, we find that most managers cannot consistently pick the correct fish. Indeed, many times the fish that they would choose finishes towards the back.
At AssetBuilder we believe that instead of trying to “pick” winners based on current market conditions, or the latest headlines, we look at characteristics of high performing companies that have been consistent over time. Some of these traits make logical sense. For instance, a group of profitable companies would, over time, outperform a similarly sized group of companies that is not profitable. Instead of trying to pick a single large cap company to add to a portfolio (active manager) or buying the entire stable of large cap companies (index manager), AssetBuilder works with our partners to select companies within the large cap space that are profitable. Implementing this strategy across different industries, geographies, and time periods will enhance returns for our clients.
AssetBuilder uses index strategies that take advantage of long-standing academic concepts such as “efficient markets” and “modern portfolio theory.” A large body of academic research highlights the fact that long-term equity performance can be explained by various factors. In order for these factors to be implemented in a portfolio, the factor must take place across multiple industries, geographies, and be pervasive across time periods. In other words, it must be tested and proven.