At Axiome we endeavour to apply academic research to the real world of investment. Our aim is to structure globally diversified portfolios for our clients and to add value through portfolio engineering and smart trading.
Our investment philosophy encompasses the following:
• Markets are efficient
Markets work and, for investment purposes, assets are fairly priced
• Risk and Return Are Related
Priced risk factors determine expected return
• Diversification is Essential
Diversification is the antidote to uncertainty. Concentrated investments add risk with no additional expected return.
• Structure Explains Performance
Asset allocation principally determines results in a broadly diversified portfolio.
Academic Framework: Modern Portfolio Theory
The underlying concepts of Modern Portfolio Theory, as recognised by the 1990 Nobel Prize include:
• Investors are risk averse. The only acceptable risk is that which is adequately compensated by potential portfolio returns.
• Markets are efficient. It is virtually impossible to know ahead of time the next direction of the market as a whole or of any individual security. It is, therefore, unlikely that any portfolio will succeed in consistently “beating the market”.
• The portfolio as a whole is more important than an individual security. The appropriate allocation of capital among asset classes (stocks, bonds, cash, etc.) will have far more influence on long-term portfolio results than the selection of individual securities. Investing for the long-term (preferably longer than ten years) becomes critical to investment success because it allows the long-term characteristics of the asset classes to surface.
• For every risk level, there exists an optimal combination of asset classes that will maximise returns. A diverse set of asset classes will be selected to help minimise risk. The proportionality of the mix of asset classes will determine the long-term risk and return characteristics of the portfolio as a whole.
• Portfolio risk can be decreased by increasing diversification of the portfolio and by lowering the correlation of market behaviour among the asset classes selected. (Correlation is the statistical term for the extent to which two asset classes move in tandem or opposition to one another).
Asset Class Investing
Asset Class investing has its roots in the research of two leading financial economists, Eugene Fama (University of Chicago) and Kenneth French (Dartmouth College). Their research showed that the share market is “efficient” and that no active investor has the ability to consistently beat the market through smart timing or shrewd stock picking.
An asset class is a group of securities with similar risk and return characteristics. Examples include large and small cap shares (shares of companies identified based on the size of their market value), value and growth shares, fixed income securities and property.
Asset Class investing utilises advanced portfolio engineering that is founded on the evidence that structured exposure to relevant market dimensions will deliver the highest returns over time.
We recommend to our clients, the implementation of a portfolio with a core allocation to structured asset classes. This will harness the best aspects of passive management without the inefficiencies of some index strategies.
Academic research suggests that the decision to allocate total assets among various asset classes will far outweigh security selection and other decisions that impact portfolio performance.
