James Baker

Adding constraints to the portfolio construction process (e.g. low carbon intensity) should not raise expected returns. Otherwise, why weren’t you invested in that portfolio in the first place? #ESG #Investing #ExpectedReturns

𝗦𝗼, 𝗛𝗼𝘄 𝗛𝗮𝘃𝗲 𝗢𝘂𝗿 𝗜𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗣𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼𝘀 𝗣𝗲𝗿𝗳𝗼𝗿𝗺𝗲𝗱? After the Great Financial Crisis of 2007–2009, my colleagues and I embarked upon a complete review of our investment strategy and the advice we offered to clients. Before that, we had been recommending active managers and discretionary fund managers, believing that the 'experts' would be able to use their skills and resources to successfully navigate the volatile markets. The reality was that none of them did, and many funds fell even further than the broad market. We knew there had to be a better way. So, we spent a year reviewing the academic data, conducting independent research, and undertaking detailed analyses to build our own in-house model portfolios. We were meticulous in our approach and relied upon empirical data from impartial sources, not from the investment industry, which has a vested interest in maintaining the status quo. An advantage of being independent is that we have access to the entire market for products and services and do not have to recommend in-house funds. Our only focus is on what's best for our clients based on the evidence. We launched our portfolios in 2011 and have been recommending them to our clients ever since. So, how have we stacked up against our competition? Independent investment consultancy, Albion Strategic Consulting has audited our performance and compared it with 127* leading managers in the UK, including; - Brooks MacDonald - Cannacord Genuity - Fisher Investments - Quilter - Schroders - St James Place - Tilney (*The full list is in the image below) The analyses confirmed as follows; - 𝗖𝗔𝗠 𝟲𝟬/𝟰𝟬 𝗣𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼 - 𝗢𝘂𝘁𝗽𝗲𝗿𝗳𝗼𝗿𝗺𝗲𝗱 𝟵𝟬% 𝗼𝗳 𝗼𝘂𝗿 𝗰𝗼𝗺𝗽𝗲𝘁𝗶𝘁𝗼𝗿𝘀 - 𝗖𝗔𝗠 𝟴𝟬/𝟮𝟬 𝗣𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼 - 𝗢𝘂𝘁𝗽𝗲𝗿𝗳𝗼𝗿𝗺𝗲𝗱 𝟴𝟲% 𝗼𝗳 𝗼𝘂𝗿 𝗰𝗼𝗺𝗽𝗲𝘁𝗶𝘁𝗼𝗿𝘀 - 𝗖𝗔𝗠 𝟭𝟬𝟬% 𝗘𝗾𝘂𝗶𝘁𝘆 𝗣𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼 - 𝗢𝘂𝘁𝗽𝗲𝗿𝗳𝗼𝗿𝗺𝗲𝗱 𝟵𝟭% 𝗼𝗳 𝗼𝘂𝗿 𝗰𝗼𝗺𝗽𝗲𝘁𝗶𝘁𝗼𝗿𝘀 How is it possible that a boutique financial planning firm can consistently beat the giants of the industry with all their research teams, armies of economists and sophisticated technology Simple; It's not because we’re smarter than them. It's because we avoid doing dumb things such as timing the market, overtrading, and paying excessive fees, That's why we call it Intelligent Investing™ and why our clients have enjoyed outstanding investment returns for many years as we guide them to financial freedom. To learn more about accessing an independent, world-class investing philosophy, download our free guide to Intelligent Investing using the link in the next tweet ⬇️

Keep your eye on the golden ball. How many reruns until we feel the ball is ‘skilfully’ above average? Short term (eg 3 or 5yr) performance provides no indication of active fund manager skill. Don’t be fooled by the noise. App credit (it’s free!): apps.apple.com/gb/app/galton-…

@ServoWealth @BigBoyBern80872 I actually just expressed that someone needs to take the other side of the trade. Can’t have value without growth, can’t have small without large? “The case to just own beta doesn’t exist” - that is what I was questioning. It’s the aggregate view!

@Albion__James @BigBoyBern80872 You said “if everyone believed in factors they wouldn’t exist.” I’m saying everyone believes in the ERP—the original factor—& it exists. No? (This is of course setting aside the absurdity of everyone knowing about and going all-in on factors like small and value)

No serious investor considers Vanguard funds good for value exposure. They’re basic index funds. They’re cheap. That’s it. This Vanguard Fund Is a Top Choice for Value Investors morningstar.com/funds/this-van…

@ServoWealth @BigBoyBern80872 No I don’t, which is the point? Bond buyers needs a bond seller, just like every long only value portfolios needs someone to own overweights in the growth stocks! It’s not a controversial statement it’s a mathematical fact, no?

@Albion__James @BigBoyBern80872 not true. Everyone things stocks have higher expected returns than bonds, yet stock & bond markets still clear. Do you think all stocks and all bonds have the same expected returns?

@ServoWealth @BigBoyBern80872 If everybody else thought the same the factors wouldn’t exist though? Need somebody else to take the other side of those trades!

@BigBoyBern80872 And the case today to own just beta in a multi-factor world doesn’t exist. Even if you want the slightest of tilts in a market-wide package for super cheap, Core Market Equity funds have you covered. To completely ignore size/value/profitability today is nonsensical

11/ Attempt to second guess market prices at your peril! #investment #fundmanagement #indexfunds #activemanagement

10/ 🔴 The red bars represent the percentage of judgmental developed equity fund managers that merged or liquidated over each time period.

9/ ⚪ The grey bars represent the percentage of judgmental developed equity fund managers that were beaten by the Vanguard fund over each time period on a volatility-adjusted basis.

8/ 🟠 The orange bars represent the percentage of judgmental developed equity fund managers that were beaten by the Vanguard fund over each time period.

7/ The chart below shows the Vanguard fund compared to a cohort of judgmental developed equity managers over time from our proprietary GAME™ study - it looks almost identical to the chart using the MSCI World Index as the benchmark.

6/ #2 “Some managers aren’t trying to beat an index” - fair point, but it raises the question of what other goals might be desirable. Some managers promise strong volatility-adjusted returns, others promise lower drawdowns in times of crisis… very few succeed through time.

1/ Shoutout to @AlanJLSmith and Keith Butten CFPcm for the reference to our Global Active Manager Evaluation (GAME™), two of the best in the industry! @AlbionStrategic

5/ Example: The 0.18% OCF Vanguard Global Stock Index Fund has underperformed its benchmark, the MSCI World Index, by an annualized 0.08%, 0.07%, and 0.05% over 5, 3, and 1-year(s) to the end of 2023. Nothing to see here, Mr. Judgmental Manager!

4/ The few basis points to achieve market-like returns over the long run massively outweigh the opportunity cost of choosing the wrong judgmental manager.

3/ Two common challenges from the judgmental side of the industry: #1 “All index funds underperform their benchmark” - yes and no. Advances in technology and some managers’ securities lending policies have narrowed the gap between index funds and their benchmarks.

2/ Nearly 700,000 open end funds, with less than 1% outperforming with statistical significance. Selecting a judgmental (active) manager is tricky given the evidence on survivorship and performance.

Great to attend @AdviserPodcast at #TRAPLive this evening, and good to meet some of the supporting community. Top work 🎙️

If it’s higher expected returns you want, whatever you do don’t bet on Chelsea 😉🎣 🔴⚪️ #afc

The most common outcome for a single stock, rounded to 5%, is a total loss. The goal is solid returns over long time frames and being able to continuously play the game. Globally diversified index funds are the surest way to accomplish this.