Our approach to capital market science is based firmly on the Fama French 3 factor model of investing. This works on the basis that there are 3 basic principles which can maximise a return on investment.

1. In the long term smaller companies stocks outperform larger ones.

2. In the long term value stocks out perform growth stocks.

3. In the long term stocks outperform bonds.

Decades of academic research has been used to formulate this investment strategy which differs from traditional fund management by using a patient and flexible approach to trading based on small company stocks and value stocks. These are documented worldwide for yielding higher returns.

In real terms this means investing in companies which offer the potential to deliver real wealth rather than gambling on gold or commodities or trying to take advantage of pricing “mistakes” and outguessing the market.

Value and Smaller companies outperform over the longer term because the cost of capital is greater.

To illustrate the point a pound invested in a large stock index in 1928 was worth £2,661 in 2005 whereas a pound in the small cap index was worth £7,370 – almost three times as much. However many large institutional investors are unable to take advantage of these yields as they are prohibited from taking a large enough stake to make an impact on their fund portfolios.

If you are an individual or smaller strategic investor that’s good news for you.

Back to 3SI model

Reproduced with the kind permssion of Dimensional Fund Advisors.