Investment Philosophy
Two value managers, same benchmark, same research, opposite conclusions on the same stock. Each thesis sounded rock solid. One was right, one was wrong, and luck decided which was which.
My investment philosophy evolved as my career did. I started on the internal desk for an active management firm. My “selling isn't for me” instincts quickly led me to pursue the CFA Charter and transition into the more technical role of Investment Specialist.
In that role, I was part of the broader team that conducted due diligence on subadvisors. I joined those meetings, sometimes with celebrity portfolio managers.
One morning set me on a course of doubt. We heard, separately and back-to-back, from two value portfolio managers. First, the contrarian value manager. She was asked about her largest relative underweight: no position in Home Depot. She went on for minutes explaining why Home Depot was a stock she wanted no part of. It sounded like a solid thesis to me.
Next, the dividend value manager walked in. He was asked about his relative overweight in Home Depot. He went into why it was such a strong conviction pick. It, too, sounded like a solid thesis to me.
That’s when it hit me. Each portfolio manager, managing a large-cap value portfolio against the same benchmark, reached independent, contrasting conclusions after digesting the same research from the same global industry analyst. Each thesis sounded rock solid. One was right, one was wrong, and luck decided which was which.
I knew there had to be a better way. Influenced by active management circles, I fell for the “indexing is un-American” point of view. I hadn’t found that better way yet.
That changed when I was introduced to Dimensional Fund Advisors. The academic framework made sense to me. The focus on relentlessly efficient implementation was eye-opening. Before I knew it, I was sitting in Dimensional's Charlotte, NC office as an employee. Finally, I represented something I believed in. My time at Dimensional shaped HPM’s investment philosophy, and my time working for active managers cements my conviction in it.
I don’t rely on the whims of a portfolio manager.
HPM’s investment philosophy relies on peer-reviewed academic research in financial economics, portfolio optimization, and multi-factor asset pricing models, supported by nearly a century of market data. A few breakthroughs in financial science have a meaningful impact on HPM’s approach:
Both of those value managers were reading the same research, but everything they knew was already priced in. Nobody can predict the future accurately and repeatedly.
HPM believes global capital markets price securities efficiently and that a stock’s or bond’s current price continuously incorporates the forward-looking, collective wisdom of all market participants each day. Empirical evidence suggests that consistently outperforming the broader market through active security picking or tactical market timing is highly improbable after fees and transaction costs.
1. The Efficient Markets Hypothesis
How you combine asset classes matters more than which securities you pick within them.
Pioneered by Nobel Laureate Harry Markowitz, MPT forms the structural foundation of HPM’s diversification framework. It underpins the process of blending distinct asset classes with varying risk and return profiles. By analyzing how different asset classes move relative to one another, HPM constructs portfolios designed to maximize expected returns for a given level of expected risk.
2. Modern Portfolio Theory
Certain characteristics of securities have been associated with higher expected returns across markets and across time periods.
Decades of academic research have identified these characteristics, called factors, that are associated with higher expected returns across different geographic markets and historical cycles. This research, pioneered by Nobel Laureate Eugene Fama and expanded by scholars such as Ken French and Robert Novy-Marx, forms the intellectual basis of HPM's models. HPM builds and manages portfolios that systematically tilt toward these factors to pursue higher expected returns for given levels of expected risk over longer periods.
3. Factor-Based Pricing Models
HPM believes this philosophy is best implemented by taking a long-term, strategic approach to markets and by prioritizing investment vehicles with strong factor loadings, low fees, tax efficiency, and effective implementation. For asset classes that don’t exhibit meaningful factor premiums but have a place in portfolios, implementation is best done with low-cost, diversified index funds. I no longer believe they are un-American!
What This Means in Practice
Descriptions of academic research and investment theory are provided for educational purposes and do not constitute a recommendation. No assurance is given that any theory or research finding will produce a particular result.