The Role of Asset Classes

The Role of Asset Classes


We believe that the equity markets are inefficient. According to behavioral finance, most people tend to make decisions based on emotions rather than rationality. This causes stock prices to deviate from their intrinsic value thus creating opportunities for disciplined investors. Another contributor to market inefficiencies is the institutional model that is followed by large firms. An active manager can only add value by deviating from the benchmark index. However, the evidence shows that managers, on average, build portfolios not significantly different from their benchmarks due to institutional factors that encourage them to over-diversify. We believe that both investors’ behavioral biases as well as the dominance of large institutions are structural phenomena that can be exploited systematically to earn excess returns over the long term.

Fixed Income

Contrary to the equity markets, the degree of opportunity for active management in fixed income is less promising due to the high price efficiency of these markets. For specialized areas such as mortgage backed securities or leveraged loans that require deep asset class expertise and strong risk management, we seek active managers with a proven track record. To gain exposure to other more efficient areas of fixed income we employ highly diversified, low-cost investment vehicles such as exchange traded funds.


Traditional alternative investments such as commodities, real estate and high yield fixed income provide a positive but limited benefit to overall portfolio efficiency due to their positive correlation to equities. Non-traditional absolute alternatives such as event-driven and value-driven strategies tend to exhibit low correlation with equities and bonds and therefore provide powerful diversification benefits.