Investment Philosophy

Every out-performer or winner must be offset by an under-performer or loser. As all investors constitute ‘The Market’, the average investor will receive market returns, before costs. In the real world, costs in their widest sense make a substantial impact on returns, making investing a significantly less-than-zero-sum game; implying that the average investor will receive below the market returns by the sum of these costs.

Not putting all your eggs in one basket and spreading investments into different building blocks, or asset classes, is intuitively easy to accept.

Underpinning the idea of diversification is a sophisticated mathematical theory known as portfolio ‘mean variance optimisation’. Once you know the returns, risk (annualised standard deviation) and the relationship between the return series of every pair of asset classes in the portfolio (correlation), it is possible to calculate the beneficial effect in the reduction of risk per unit of return achieved in the portfolio.

Diversification benefits can be harvested at the level of both asset allocation, using mean variance optimisation, as well as when combining factors to maximise returns and minimize portfolio risk.

Achieving higher levels of return requires an investor to assume a higher level of risk. Markets are functional and efficient enough to mean there is rarely such a thing as a free lunch. Across the universe of available investments, the available outcomes can be measured as return per unit of risk.

Among the first models researchers used to rigorously test ideas about market risk and returns is the Capital Asset Pricing Model (CAPM), developed by the Nobel Prize winning academic Professor William Sharpe. This describes mathematically the relationship between market risk and the level of expected returns of the given assets.

This model, helping explain what was named the ‘market factor’, was followed with definitive studies by Nobel Laureates Eugene Fama and Kenneth French introducing the ‘value’ and ‘size’ factors which together with the market factor help explain the majority of variation of portfolio returns. Other factors have since emerged to help better explain risk and rewards in markets.  

Factor based investing, where assets are decomposed into bundles of underlying risk factors, emerged from this research to help investors achieve their desired returns at lowest risk and lowest cost.

The vast majority of financial advisers in the UK cannot influence product or service providers; they simply do not produce enough business to have a voice. ebi can and does, acting as an agent on behalf of its users and their clients to obtain lower trading costs, launch new funds, and access otherwise unavailable share classes with lower charging structures e.g. Vanguard Institutional Plus.

In a capitalist society, capital and labour are generally put to efficient use, seeking to generate the maximum wealth for those who take on the risk of enterprise. It is assumed that free markets price financial assets effectively and fairly, based on supply and demand, where profits are ultimately expected to flow through to owners.

The goal of keeping ebi’s investment process relatively simple is not for simplicity’s sake, but because that is what the empirical evidence suggests we should be doing.