Intelligent portfolios for intelligent investors
We believe in Evidence-Based Investing (EBI). EBI is a systematic and disciplined approach to investment management that objectively uses empirical data and financial science to optimise investment outcomes for clients. We are fully aware that the future is unknowable, and recognise that it is meaningless to forecast what could or may happen.
As such, EBI seeks to filter out the noise, distractions and emotions from the investing process. Conventional investing involves predictions, emotions and unverified facts to form the thesis of why we "should" buy this winner or "avoid" this loser. We would rather replace these transient and unsubstantiated themes with facts, logic and reason to allow investors to capture the best results.
Our investment philosophy below highlights these beliefs.
(Click the button to download our investment philosophy in a PDF format).
1. Markets Work in Cycles
Stock and bond markets have been around for centuries as a way for countries and companies to raise capital. What's important to know is that markets work in cycles. Sometimes, investors get trapped in secular bear markets which do not make money for years. That is when investors lose hope. Fret not; the duration and magnitude of up-cycles in the past have far outweighed the down-cycles of the market. Empirical evidence shows that markets spend more than 60% of the time going up, and only 30% of the time going down.
Fig. 1. Growth of a dollar – MSCI World Index (net dividends), 1970–2016
Source: Dimensional Fund Advisers
- History of the Efficient Market Hypothesis (PDF), Martin Sewell, UCL department of Computer Science
- The Behaviour of Stock Market Prices (PDF), Eugene Fama, Journal of Business, 1965
- The Cost of Capital, Corporation Finance and Theory of Investment (PDF), Franco Modigliani and Merton Miller, American Economic Review 1958
- Explaining Stock Returns: A Literature Survey (PDF), James Davis, 2001
2. Markets Reward Long-Term Investors
Historically, capital markets have made money for long-term investors. In return for supplying money for capitalism, investors receive a return that is far above inflation or even the guaranteed CPF rate. Even though investors will be subject to market cycles and at times receive a return lower than bank deposits, the power of markets will eventually reward long-term investors.
Fig. 2. Growth of SGD$1 from 1975–Present
Source: Singapore Property Data from Singapore Dept of Statistics, Bank of International Settlements, URA. Singapore stock market data from MSCI Singapore Total Return Index (SGD). Global stock market data from MSCI World Total Return Net Index rebased to SGD.
- A Brief History of Market Efficiency (PDF), Dimson, Mussavian, European Financial Management Volume 4 Mar 1998
- Efficient Capital Markets: A Review of Theory and Empirical Work (PDF), Eugene Fama, Journal of Finance 1970
- Proof That Properly Anticipated Prices Fluctuate Randomly, (PDF), Paul A. Samuelson, Massachusetts Institute of Technology, 1965
3. Invest, Don't Speculate
It is easy to be swayed into chasing the hottest investment, but only a small percentage of such “bets” ever pan out. Given that forecasts are nearly always wrong, the best strategy is to maintain a long-term perspective. Investing in the best company or the most interesting forecast by well-known financial institutions has been shown to be detrimental to your capital. Forget about stock-picking, be systematic, and diversify broadly and globally to obtain the best risk-adjusted return.
Fig. 3. The SPIVA study shows the number of active funds outperformed by diversified stock market indices over different periods. Active investing is where the best and brightest in the finance industry pick specific stocks to try and beat their benchmark. These pros cannot seem to outperform consistently, and the conclusion for investors should be to hold a broadly diversified portfolio.
Fig. 4. Goldman Sachs forecast in January 2014 that the price of oil was set to rise to the targets shown in the table below, but over the year it fell below US$50. In February 2016, Goldman made another forecast that oil would fall below US$20, only for it to rise to about US$45 over the next 6 months.
- Likely Gains from Market Timing, William Sharpe, Financial Analysts Journal Vol.31, No.2 (Mar-Apr 1975)
- Arithmetic of Active Management, William Sharpe, Financial Analysts Journal 1991
- Adjustment of Stock Prices to New Information (PDF), Fama, Jensen, Fisher, Lawrence and Roll, International Economic Review 1969
- Stock Market Forecasting (PDF), Alfred Cowles, Econometrica 1944
- Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns (PDF), Barber, Lehavy, The Journal of Finance, 2001
- Eliminating Biases in Evaluating Mutual Fund Performance from a Survivorship Free Sample (PDF), Horst Jenke, et al, 1998
- Evaluation and Ranking of Market Forecasters (PDF), Bailey, Borwein, Salehipour, Lopez de Prado, 2017.
4. Nobody Can Forecast Winners
A market sector which outperforms in one year typically does poorly for the next. It is thus extremely difficult, if not impossible, to forecast winners. Rather than try to time the market, the most systematic way to receive returns is to hold a broadly-diversified, risk-adjusted portfolio suitable for each individual's risk tolerance.
Fig. 5. Ranked Annual Total Returns of Key Indices (1996–2015). The high variability of which sector will perform best makes forecasting virtually impossible.
Source: Informa Investment Solutions
- Random Walks in Stock Market Prices (PDF), Eugene Fama, Financial Analysts Journal Oct 1965
- Trading Is Hazardous to Your Wealth: The Common Stock Performance of Individual Investors (PDF), Odean and Barber, Journal of Finance April 2000
- On Market Timing and Investment Performance. II. "Statistical Procedures for Evaluating Forecasting Skills" (PDF), Henriksson and Merton, The Journal of Business, Vol. 54, No. 4 (Oct., 1981)
- Market Timing and Mutual Fund Performance: An Empirical Investigation (PDF), Roy D Henriksson, The Journal of Business, Vol 57, No 1, Part 1, Jan 1984.
- The Courage of Misguided Convictions, (PDF), Barber, Odean, 1999.
- The Behavior of Individual Investors, (PDF), Barber, Odean, 2013.
5. Put Risk First
Buying a basket of stocks that are concentrated in one industry or country exposes investors to unnecessary risks. Many investors are blissfully ignorant of what their investments could lose. We believe that no investor should be kept in the dark, and everyone deserves a scientifically-constructed portfolio with properly-quantified and verifiable risk and return statistics. All our portfolios undergo periodic simulations to check possible losses should any adverse market event occur.
Fig. 6. Fig. 6. Portfolio Analytics and Simulation to Ensure Risk/Reward is Optimised
- Determinants of Portfolio Performance (PDF), Brinson Hood Beebower, Financial Analysts Journal 1986
- Modern Portfolio Theory (PDF), Dr Wan Siaw Peng
- Portfolio Selection (PDF), Harry Markowitz, Journal of Finance 1952
- Does Asset Allocation Policy Explain 40, 90 or 100 Percent of Performance (PDF), Ibbotson, Kaplan, Financial Analysts Journal, 2000
6. Avoid Expensive Tactical Trading Strategies
No one can control nor predict whether markets would go up or down tomorrow. However, we can control most aspects of an investor's experience through proper portfolio construction, risk management and, most importantly, managing costs within a portfolio.
We choose the best liquid, easy-to-understand and low-cost assets to build a client's portfolio. Investors need to stay away from high-commission, high-cost esoteric products. Finding clean, clear-cut investment strategies that are allocated to well-known and identifiable asset classes is the most efficient way to grow wealth at a stable rate.
Fig. 7. Example of the hidden costs in a typical structured product sold by banks
Fig. 8. Typical Active Funds which purportedly help investors to pick the best stocks or time the best markets have high costs due to increased trading and fees paid to the managers. Be aware that such hidden costs slowly erode away your returns over the long term.
- Structured Products: Performance, Costs and Investments White Paper (PDF), Swiss Finance Institute, 2015
- Issuer Margins for Structured Products (PDF), EDG, 2013
- How Banks Make Money on Structured Products (PDF), DDV
7. Implement the Greatest Ideas from Financial Science
The brightest minds from finance academia have provided us with great ideas to construct our investment portfolios. We prefer to implement these concepts based on decades of empirical research to our clients' benefit, rather than speculate and predict market movements based on fleeting and transient themes.
Fig. 9. Implementing the best ideas from Nobel Laureates
- The Relationship Between Return and Market Value of Common Stocks (PDF), Rolf Banz, 1980
- Term Structure Forecasts of Interest Rates, Inflation and Real Returns (PDF), Fama, 1989
- The Capital Asset Pricing Model: Theory and Evidence (PDF), Fama, French 2004
- Multi-Factor Explanations of Asset Pricing Anomalies (PDF), Fama, French 1996
- The Other Side of Value: The Gross Profitability Premium (PDF), Novy-Marx, 2012
- Quality Investing (PDF), Novy-Marx, Ongoing
- The Profitability and Investment Premium: Pre-1963 Evidence (PDF), Wahal, 2016
8. Seek Sources of Returns That Are Evidence-Based
Good investing is simple and need not be complex nor difficult to understand. Decades of empirical research has shown that securities that are able to achieve higher expected returns share similar characteristics. Using an investment approach grounded in this economic theory, we help investors achieve their goals over the long run by building portfolios focusing on the following equity and fixed income dimensions of returns:
Fig. 10. Dimensions of Returns
Source: Dimensional Fund Advisers
- A Five Factor Asset Pricing Model (PDF), Fama, French 2014
- Characteristics, Covariances, and Average Returns (PDF), Fama, French, Davis 1999
- The CAPM and The Three Factor Model of Fama and French (PDF)
9. Systematic Investing Will Beat Emotional Investing
Headlines stir our emotions and trigger impulsive thought processes that bypass our rationality and may result in decisions that we later regret. Investment decisions should take place within a process-driven framework: starting from the advisory process to portfolio construction, asset allocation, right down to the trading. Our proprietary Risk Matrix system presents us with objective data that may guide us to stay invested even when market pundits are telling us otherwise, or to stay out of the market when over-exuberant investors are piling into risky assets.
Fig. 11. Ignore the news and stick with a process that is evidence-based, tried and tested.
- Near-Coincident Indicators of Systemic Stress (PDF), Arsov, Canetti, Kodres, Mitra, IMF Monetary and Capital Markets Working Paper, 2013
- Systemic risk diagnostics: coincident indicators and early warning signals (PDF), Schwaab, Koopman, Lucas, Global Systemic Risk Conference, 2011
- CoVar (PDF), Adrian, Tobias, Brunnermeier, Federal Reserve Bank of New York Staff Reports, 2010
- Measuring Financial Market Stress (PDF), Kliesen, Smith, Economic Synopses, Federal Reserve Bank of St Louis, 2010