Nothing is perfect

Advisers will be more than familiar with the investment industry’s mantra: Past performance is not a reliable guide to future returns.

Advocates of harnessing academic research to construct portfolios agree. Nobody can predict the future, and it is certainly true that small caps, value and low volatility have underperformed recently.

But the long outperformance of these market segments has been established through rigorous studies across markets and over time. Equally importantly, there are rational, consistent explanations for each finding.

Harvesting market returns

Importantly, an investment approach that hooks into the returns generated by the global economic engine has consistently outperformed its actively managed peer group.

Evidence-based investing is a long-term approach, but the consistency and explainability of returns, and the low costs of implementation through index funds and exchange-traded funds, make it a suitable and attractive option for many clients.

Mark Northway is an investment manager at Sparrows Capital