From Academic Theory to Real-World Strategies
At Plancorp, we are strong advocates of Modern Portfolio Theory, the Capital Asset Pricing Model (CAPM), and the Three Factor Model and derive our investment strategies from the most current academic thinking and research. Much of this body of research points to the fact that there is actually little to no value-added derived from the traditional stock picking and market timing approaches favored by most investment professionals today. Academic research instead indicates that portfolio performance is primarily the result of the asset allocation decision made.
Portfolio construction begins with the goal of attempting to capture the return that the various markets give us, with the ultimate goal of generating returns that add incremental value over and above the return of the overall market. We do this by "owning the market" ...investing in various asset classes around the world and then into subsets of those asset classes. This broad diversification strategy addresses both the risk issue as well as the return expectation. We attempt to add value on the return side by overweighting in those areas of the market that have historically shown to produce the best returns.
This investment approach borrows from groundbreaking research performed by some of the leading academics in the world of finance, and it forms the cornerstone of our investment philosophy. It also provides us with the intellectual underpinnings that allow us to bring some rationale to the investment markets.
Finally, since we are strong proponents of the efficient market theory (which states that at any given point in time, the actual price of a security is a good estimate of its intrinsic value), we take a more academic-based, passive approach to the investment process, as opposed to the more traditional active approach favored by most money managers today. We find that there are many advantages to the passive approach to investing, especially in the areas of cost, performance, style drift, cash drag, and fiduciary responsibility.