A cornerstone concept of modern economics is that a free and competitive market system is the most efficient way to allocate resources. Securities markets throughout the world have a history of rewarding investors for the capital they supply. Companies compete for investment capital, and millions of investors compete with each other to find the most attractive returns. This competition quickly drives prices to fair value, ensuring that no investor can expect greater returns without taking greater risk.
We have reached the following conclusions with respect to the public capital markets:
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Current market prices incorporate all available information and expectations about the future, and are therefore the best approximation of intrinsic value
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Price changes are generally due to unforeseen events and cannot be predicted with any consistency
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Pricing errors occur, but they do not do so in predictable patterns and it is difficult to recognize them in real time
We use institutional mutual funds that incorporate the following concepts in our asset class investing approach:
Capture Market Rates of Return
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Attempt to capture market rates of return by investing in large numbers of securities in selected asset classes, resulting in portfolios that offer exposure to thousands of securities (through mutual funds).
Exclude Certain Securities
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Exclude Initial Public Offerings, financially distressed and bankrupt companies, and illiquid securities.
Minimize Trading Costs
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Own a broad representation of securities in an asset classes and hold onto them, rather than frequently buying and selling unnecessarily.
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Do not attempt to track indexes as this can result in significant trading costs.
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Allow portfolio managers flexibility on when to add or remove individual securities from asset classes to account for momentum effects, trading costs, etc.