Portfolio Management

The Capital Company’s Evidence Based Investing strategy is our flagship strategy and one that is backed by decades of Nobel-prize-winning research. We employ a highly disciplined approach to investing and seek to filter through noise, information, hype and emotion to make investment decisions that are defensible and as devoid of behavioral biases as possible.

We use Evidence Based Investing to increase the expected returns in our clients’ portfolios and build long-term wealth. Rather than relying on futile forecasting or trying to outguess others, we draw information about expected returns from the market itself—letting the collective knowledge of its millions of buyers and sellers set security prices.

Letting markets do what they do best—drive information into prices—frees us up to spend time where we believe we have an advantage, namely in how we interpret the research, how we design and manage portfolios, and how we service our clients. It means we take a less subjective, more systematic approach to investing—an approach we can implement consistently and investors can understand and stick with, even in challenging market environments.

Academic research has yielded six expected return premia for long-term investors:

  1. Equity Premium: equities have a higher expected return than bonds

  2. Small Cap Premium: Smaller company stocks have a higher expected return than large company stocks

  3. Value Premium: Relatively cheaper stocks have higher expected return than expensive (growth stocks)

  4. Profitability Premium: Companies with higher profitability of book equity have a higher expected return than those with lower profitability

  5. Term Premium: Longer maturity bonds have higher expected returns than shorter maturity bonds

  6. Credit Premium: Lower credit quality bonds have higher expected returns than higher credit quality bonds

At The Capital Company, we are huge proponents of evidence-based investing. The above-mentioned factors that influence returns are well documented in markets around the world and are persistent across different time periods. While past performance is not necessarily an indication of future performance in any given year, we can endeavor to increase the expected return of a low-cost, already well-diversified portfolio by tilting it more towards these factors.

We manage investment risks by using the combined powers of diversification and asset allocation.

Diversification is a means to dampen avoidable, concentrated risks. By spreading your holdings widely and globally, if some of them are affected by a concentrated risk, you can offset the damage done with plenty of other unaffected holdings. While some risks can be diversified away, market risk however remains and is expected to enhance your long-term returns if you build them into your total portfolio, and if you stay the course with them over time.

Asset allocation is determined by the investor’s specific goals and times frames, and guided by his or her risk tolerance and capacity. By blending a customized mix of riskier and less risky asset classes, we seek to build wealth toward our clients’ personal financial goals while fine-tuning the risks involved.