Our Investment Beliefs
While leveraging the most advanced financial science, patient long-term investors are likely to be additionally rewarded for minimizing unnecessary risks based on the known trends affecting the world in the coming decades.
CONSIDER THE DRIVERS OF RETURNS
Academic research has identified key dimensions – small cap premium, value premium and profitability premium – which point to differences in expected returns. These dimensions are pervasive, persistent, and robust. They can be pursued in cost-effective portfolios, which have consistently outperformed their benchmarks — and index funds available to everyday investors — over the long run.
PRACTICE SMART DIVERSIFICATION
Diversification helps reduce risks that have no expected return, but diversifying within the domestic US market is not enough. By holding a globally diversified portfolio, investors are well positioned to capture returns wherever they occur.
AVOID STOCK PICKING AND MARKET TIMING
You never know which market segments will outperform from year to year. And, the market’s pricing power makes it difficult for investors who try to outsmart other participants through stock picking or market timing. As evidence, only 17% of actively managed equity mutual funds survived and outperformed their benchmarks over a recent 10-year period.
AVOID UNNECESSARY FOSSIL FUEL ENERGY RISKS
Since it is well known that carbon dioxide and methane emissions cause the Earth to warm, fossil fuel energy markets represent the Ground Zero of climate change risk. As such, they are increasingly vulnerable to shocks in confidence and sudden changes in market perceptions driven by events in the political and natural environment, as well as rapid advances in alternative energy technology.
If properly constructed, the expected impact of “fossil free” portfolios on returns is neutral to positive for long-term investors1.
Macroclimate’s equity strategy is powered by ultra-low-carbon Sustainable versions of Dimensional Core Equity Portfolios. Since these funds have similar exposure to the drivers of returns as Dimensional’s Unfiltered versions (see #1), expected returns are similar over the long term.
As climate change effects intensify, downside risks of carbon-intensive assets may escalate2. Patient long-term investors are likely to be rewarded for minimizing those unnecessary risks.
1 Versus “unfiltered” but otherwise similar benchmarks. Past performance is no guarantee of future results.
2 Carbon-related investments are subject to both real and perceived political risks, which are unknowable, as well as unpredictable, potentially catastrophic changes in the physical world that might affect investor sentiment (favorably or unfavorably).
Are your investments overexposed to fossil fuels?