When you hear the word “science” you might immediately think of test tubes, lab coats and your favorite — or least favorite — subject in school. But the kind of science we’re talking about has nothing to do with microscopes and everything to do with financial research and analysis — all intended to decrease guesswork and speculation while increasing understanding, confidence and, potentially, returns for your portfolio. Welcome to financial science.
Landmark Research and Discoveries
Over the last several decades, financial science has given us the knowledge and tools to help address the “investing problem,” including two tools invented during World War II, which had a profound effect on economics and the theory of investments. First, the invention of “optimizing” (originally to help solve military logistics) which created mathematical methods for maximizing returns against risks. Second, the introduction of the computer not only helped solve larger optimization problems but also opened up new avenues to analyze data and derive insights.
A critical juncture for science and investing came in the 1950s when discoveries by Dr. Harry Markowitz lead to the idea that a set of portfolios could deliver the highest feasible levels of expected return for any given level of acceptable risk. This discovery revolutionized investment management and freed financial managers and investors from the previous orthodoxy that investing was all about analyzing individual stocks to find the “best” for a client’s portfolio. Markowitz’s Modern Portfolio Theory remains the predominant view about asset management even today and is the hallmark of our investment philosophy.
How Financial Science Impacts Your Portfolio
We are privileged to have Dr. Harry Markowitz and Dr. Meir Statman as members of our Investment Committee, where they provide us with powerful insights into how portfolios should be constructed.
We also work closely with Professors Eugene Fama, Sr. (like Dr. Markowitz, a Nobel Laureate) and Ken French whose landmark research identified two stock risk factors — small companies and value companies — that investors should expect to be compensated for over the long term. Further research also identified additional factors of return — including profitability and momentum — that largely determine a portfolio’s risk and return. This is why it is important to work closely with your advisor to determine how much exposure to these factors is right for your situation and long-term goals.
While the history of finance and investments has been an intricate dance between the practitioners of economic theory and the devotees of pure mathematics, together each group drives the other to greater discoveries.
By putting science on your side and applying — and continuously testing — academic research, we believe we can benefit individual investors in their search for the right portfolio.