Modern Portfolio Theory
In light of the data indicating the critical significance of asset class selection, we strongly believe that Modern Portfolio Theory (MPT) and passive asset class investing is the best way for us to develop prudent, long-term portfolios for our clients. The roots of passive asset class investing lie in the principles of MPT. The world's leading financial economists, three of whom received a Nobel prize for their contributions, conducted on-going research resulting in the formation of MPT. Major tenets of Modern Portfolio Theory are:
1. Markets process information so rapidly when determining security prices, that it is extremely difficult to gain a competitive edge by exploiting market anomalies.
2. Over time, riskier assets provide higher expected returns as compensation to investors for accepting greater risk.
3. Adding high-risk, low-correlating asset classes to a portfolio can actually reduce volatility and increase expected rates of return.
4. Passive asset class fund portfolios can be designed with the expectation of delivering over time the highest returns for a chosen level of risk
Our firm has access to no-load, institutional passive asset class mutual funds that provide what we believe are the best building blocks to meet our objective of implementing MPT. Each fund captures the return behavior of an entire asset class, letting us accurately diversify clients' investments across multiple asset classes - incorporating the expected level of risk with which each investor is comfortable. Other advantages of this approach include:
Lower costs - Passive asset class funds typically have lower operating expenses than do comparable actively managed funds.
Greater tax efficiency - passive asset class funds have relatively low turnover, so less of your annual return is consumed by taxes.