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Perspectives /

Our Scientific Approach to Investing

Phil McInnis Phil McInnis


Daniel Ong, CFA Daniel Ong, CFA


We invest in equities through a systematic process whose foundation is a scientific approach with theoretical underpinnings and empirical corroboration. When designing strategies, our focus goes beyond identifying securities with higher expected returns and includes all aspects of efficient implementation, such as turnover, opportunity costs and trading costs that can impact performance. Indexing has been a great innovation for investors, but it also has noteworthy limitations. Our strategies incorporate the positive aspects of indexing, like transparency, low turnover and broad diversification, with implementation techniques intended to help produce higher excess returns than an index-based approach.

Thousands of stocks trade every day across global equity markets and the discount rates (i.e., expected returns) for each of these stocks are set by investors through the prices upon which they agree to transact. Our knowledge of what drives differences in expected returns among securities has been advanced by decades of research pursuing an understanding of how markets price securities. Valuation theory helps explain which fundamental aspects, together with prices, influence expected stock returns. We use these insights to design strategies that put more weight in stocks with higher expected returns and exclude or underweight those stocks with lower expected returns. How we harness these insights depends on the desired level of diversification, but we feel they enable us to more precisely identify differences in expected returns compared to a broad-brush factor or smart beta approach. We believe this approach not only helps target companies with higher expected returns more efficiently, but also helps reduce any unnecessary costs, taxes, risks and tracking error related to holding securities that do not increase expected returns.

Our buy and sell decisions consider current stock prices alongside business fundamentals from company balance sheets, income statements and cash flow statements. This wholistic approach to the interaction between current stock prices and company financials differs from an index that rebalances only once or twice a year and may thereby rely on stale information from six months or even a year ago. We also pay close attention to when and how we trade in an effort to reduce transaction costs. We believe this results in strategies:

  • based on sound underlying investment principles

  • that use current prices and fundamentals to enhance expected returns

  • with broad diversification and low expected turnover and trading costs

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This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

The information in this document does not represent a recommendation to buy, sell or hold security. The trading techniques offered in this report do not guarantee best execution or pricing.


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