Episode 38 – The Science of Investing

Welcome to Market Perspectives, a Mercer Advisors podcast. Today’s episode is the science of investing. We’re gonna be talking about something really foundational. We’re gonna be talking about how people really ought to invest their stocks.

I’m Josh Zumbrun. I’m the Director of External Communications here at Mercer Advisors. And I’m joined today by Don Calcagni, our Chief Investment Officer. Don, thanks so much for being here with us.

Josh, thank you. It’s great to be here.

This is an exciting podcast because this is our first video podcast. This is gonna be available on on YouTube, available to watch. We’re still gonna really strive to make sure that we’re discussing this in a way that it still works on audio. If you’ve been listening on on Spotify or wherever else, you should continue to be able to do so. We are gonna share some charts and such as we go along, but we’ll also describe those so that if you’re listening on audio, it will still work.

So Don, let’s start off. I mean, when people think about stock investing, what’s define the problem. What is it that people are actually like, why do we invest in stocks in the first place?

I mean, I think it’s important to remember, Josh, that investing is best viewed as a means to an end. Right? It’s not a game. It’s not a sport.

It’s not a gambling website, even though I think a lot of the commercials and a lot of the big financial services providers out there kind of make it feel like it’s this Las Vegas-esque sort of experience. That’s not what investing is about. Investing is about putting capital at risk in exchange for an expected return. We’re putting that capital at risk in order to achieve very specific financial objectives for our families.

So it’s not a game to be won. It’s not a sport to be enjoyed.

It’s a very serious exercise where we are purposefully structuring our investments and our balance sheet so that with a very high degree of confidence that we can achieve some sort of future outcome for our families, whether that be retirement or sending a child to college or something along those lines. And so Josh, that’s how we think about investing, right? Is that this is a serious exercise.

We believe and we know through education and through eighty years of academic research that there is a science to investing, hence the title of this particular podcast, The Science of Investing. And so that’s what we endeavor to do here at Mercer is to bring the science of investing to our clients to help them have a better experience and to more reliably achieve their long term their long term financial goals for themselves and for their families.

It’s something that I think really sets apart the podcast we try to do here. Right? It’s so much of the things that you might encounter about the finding about the investing, they really do focus on things, picking stocks, timings mark timing markets. It’s not at all what we’re about.

And so I think actually the a great place to start is kind of the intuition that a lot of people still have about the best way to invest in stocks. A lot of people still kind of have the starting point that that you should be actively picking stocks and trying to identify winners. There’s still kind of this this very it’s kind of the presumption of a lot of what you consume in the financial media is that people ought to be active investors in some way.

Yeah. For sure. I think, you know, I think many retail investors associate investment activity like aggressive trading or market timing or trying to pick the next, you know, apple or something like that as really being the best approach to investing. They equate trading activity with value, that the more you trade, the perhaps the better you are going to do.

And the truth is, Josh, is that there is reams of real world empirical evidence, lots of academic research that just shows that all of those approaches are so highly discredited. Those are not the best approaches. In fact, those approaches are absolutely disastrous when it comes to building wealth. And in fact, there were two faculty from the University of California Berkeley, they wrote a they they did a study probably about a decade ago now where they highlighted that there is a negative relationship between stock trading and the returns that you actually earn in your account.

You’re actually better off trading less, not more in your portfolio. And so Josh, we have lots of really great evidence that we can share with our audience that just really shows that taking this active approach to investing. And again, when we say active, we mean lots of trading activity. We mean trying to forecast the future.

We mean trying to pick the next Amazon or the next Apple.

What we see is that investment managers or mutual funds that attempt to implement those approaches to stock investing, that their returns, their ability, the probability of them outperforming a very simple market portfolio over time, their success rates are absolutely abysmal. Absolutely abysmal. I mean, Josh, if we just look at U. S.

Large cap stock mutual funds,

We can share the data right here.

Yeah, we see it right here, right on this particular slide for those that can see our screen here.

And this is data by the way that comes from Standard and Poor’s, Dow, S and P. So this is third party data. This is transparent data. Anybody can go online and pull this information down.

But if we just look at all of the actively managed U.S. large company stock mutual funds in the marketplace and we compare them to a very simple benchmark, in this case the Standard and Poor’s S and P five hundred index, what we observe is that over a one year period about eighty percent of those funds fail to beat the benchmark. Those aren’t very good odds, Josh.

If we were in Las Vegas, you would not want to play a game where you had an eighty percent odds of losing. That’s no That’s no fun, right?

Twenty percent beat it, eighty percent lose.

That’s just in one

year.

That’s horrible. And that’s just in one year. And this, you’re hinting at a very key takeaway that is something that we’re gonna come back to here throughout our discussion here today. And that is that the odds get worse with time.

And so over a five year period, the probability of failure actually rises to almost ninety percent. We see that only eleven percent, basically one in ten actively managed mutual fund managers. And these are professionally trained, well educated, really smart portfolio managers with lots of financial resources that they can invest, Josh, in research and portfolio managers and talent and data and all of these great things. But one in ten actually achieve their goal of outperforming the S and P five hundred.

And those words get, those odds get even worse as time goes on over a fifteen year period. We see that only ten point one percent of active managers actually outperformed.

Now if if you are one of these investors, retail investors where hope springs eternal, may look at that

and say, doc, but what you’re

saying is there’s a chance.

There’s a chance.

There’s a

chance, right?

And I would say, sure. You know, like every you know, even a blind squirrel every now and then finds an acorn, right? Like you can get lucky and try to find that needle in the haystack, but I would say why? This is your, the sum total of your life’s savings that you’re putting at risk. And I would argue there’s a better way. And there’s lots of data, lots of science that shows there’s a much better approach here instead of trying to gamble on trying to pick some sort of guru or or hotshot who can beat the market on your behalf.

And before we move on here, I mean we do see it’s not just large cap stocks, right? It’s all domestic, it’s all multi cap, it’s global, it’s emerging markets. There’s data on other categories beyond this as well. But this is a really broad, clear phenomenon. Absolutely.

The abysmal performance of traditional actively managed stock strategies or funds is is it’s pervasive, Josh. It’s large company stocks, small company stocks, it’s across sectors, it’s across the globe, European stocks, Canadian stocks, Asian stocks, the same patterns are pervasive and they repeat themselves over time. So this is, we’re not cherry picking the data here, right? Looking at of the data, and all of the data suggests that this is an abysmal approach to investing.

And so a lot of people over the years who are familiar with the state kind of looked at it and said, all right, well I should just buy the S and P five hundred index. Passive investing. Right? And this is, we would agree, you would agree Don, a much better approach.

Far better. Yeah. Look, there’s nothing wrong with indexing. Indexing Yeah. Is a very, logical takeaway from the data that Josh, you and I were just discussing. Right? You would say, gee, if you can’t beat them, join them.

And this is why firms like the Vanguard Group have done amazingly well growing over the past, let’s call it fifty years that they’ve been in business. I think they started in nineteen seventy six.

So yeah, indexing is a great starting point. And I would argue, Josh, if an investor, if this is all they did was built an index based portfolio, they’re going to do infinitely better than the alternative, which is trying to beat the market by picking some stocks or market timing or sector rotation or all of these other highly discredited investment approaches, indexing would be a great starting point. I think the danger, I think the mistake is, and this is where good becomes the enemy of great, right? A mistake would be to stop here and say I can’t do any better.

And the reason why that’s a mistake is that we have eight decades of rigorous peer reviewed scientific research that actually suggests that, well, wait

a

minute, perhaps you could do better.

And that therein really lies the science of investing, something that we call multi factor investing. There are hundreds of academics the world over, financial economists who’ve dedicated their careers to studying these things. And there are patterns.

There are patterns in stock returns that we can observe that tend to repeat themselves over time. And what we’ve observed is that if you build portfolios around these factors, these certain characteristics of companies that you can indeed outperform over longer periods of time. And so that’s the factor investing that our audience, that our clients often hear us talk about.

And that’s that’s the definition of factor investing. It’s identifying those specific quantifiable characteristics of those quantifiable characteristics of stocks that have persisted over time, that have been shown to correlate with stronger performance.

And that’s correct. And the same things that, you know, we often hear folks like Warren Buffett talk about, you know, folks talk of, speak of Warren Buffett, you know, the Oracle of Omaha and he’s a value investor. Well value for example, is one of those factors. So a factor is just a fancy term, Josh. For some sort of financial metric that investors look at, that investors believe and that data shows is predictive of future outperformance. So the price that you pay for a stock, for example, relative to its earnings or free cash flows or what we call book value of equity, These are different metrics that investors, financial economists look at that we believe, at least when we correlate that with the returns data, what we observe is that, hey, there are certain types of companies with certain financial metrics that have been shown to outperform over longer periods of time.

And so we should show what this looks like over the long run. So this chart here on screen for those watching shows the difference between the S and P five hundred total return basis, so this is reinvesting your dividends as you go. Yep. And the multi factor approach that you just discussed. And this chart shows it from the from over over a very long period of time, from two thousand to today.

Correct. And so, know, I I always coach investors and our advisors that when you’re evaluating an investment strategy, there’s at a level, there’s two things you wanna look for. Number one is you wanna understand the magnitude of outperformance. And that’s what we’re looking at here on this particular slide where we are comparing, as you said Josh, the S and P five hundred index, very common, very inexpensive index for investors to invest in.

We’re comparing that index, that same benchmark that all of those active managers were doing such a terrible job trying to outperform, and we’re comparing that to a multi factor index that is constructed by MSCI. So MSCI is a competitor of Standard and Poor’s. It’s an index provider. Many of our audience listeners I’m sure have heard of MSCI.

And what we’re comparing the S and P to here is the MSCI USA Diversified Multi Factor Total Return Index. And this is an index, we’re showing index returns beginning in two thousand.

We can go back further, but I find it helpful to just kind of cut it off and say, okay, beginning in two thousand, from two thousand

and So was Y2K.

Yeah, yeah, Y2, I remember those days, right? We all thought the world was gonna end or something because the clocks or the computers couldn’t keep up, right? But here we are, right? We’re looking at basically, let’s call it twenty six years, twenty six and a half years through June thirtieth of this year.

So literally just as recently as a few weeks ago. And what we observe is that on an annualized basis, the factor based approach outperformed the S and P five hundred index by about one point eight percentage points annually. Now you may be thinking, well, gee, that doesn’t sound like a lot, but I would urge you to do the arithmetic on one point eight percent compounded over a twenty year period can result in an additional eighty percent of your wealth. If you just do the math, I challenge you.

Sit down, open an Excel spreadsheet and plug in some numbers. You’re gonna see that we are talking a massive increase in compound wealth over time just from that one point eight percentage points in additional return that’s available for the taking.

There’s no secret sauce here. You don’t have to hire a hedge fund manager and pay them crazy fees to do this.

Anybody can do this. These things, they exist in ETF structures and so on and so forth. But you can see here, Josh, over that very long period of time, fairly significant outperformance in U.S. stocks. If you actually looked outside of the United States to Europe, to Asia, and places like that, the outperformance is about four full percentage points per year. So we are talking a very dramatic increase in compounding expected returns over time that can really create significant amounts of balance sheet wealth for investors.

Should mention two things really quick. One is that chart was not adjusted for inflation and I looked this up that fun fact, inflation, the average price level in the United States has almost exactly doubled since two thousand. We’re almost at exactly the doubling point to put that into context. So you did lose some of those gains to inflation, to be And of course, the other thing we always point out with any of these kinds of charts, right, is that the past performance, it really is no guarantee about anything in the future.

But one of the reasons that you that we invest this way at Mercer advisors, right, is because there’s a really strong academic basis for it as well. It’s not just like this is a historical pattern and we don’t really know why it exists. That’s not the case. There’s actually a very strong academic underpinning here. And so I wondered if you could walk us through kinda what is the academic foundation that leads us to believe this is the right way to invest a stock portfolio?

Yeah, no, absolutely. And I think maybe a little bit of context is in order here. You know, why do we at Mercer immediately turn to look at the academic evidence? Well, we are fiduciaries, and what that means is we are legally obligated to always put our clients’ best interests first.

And so we look at that, Josh, as a form of our Hippocratic Oath. When a physician takes that Hippocratic Oath to serve their patient to the best of their ability. And so the way I think about it is, look, if we had some sort of perhaps a cancer or something like that, and we’re meeting with our team of oncologists, I would think that most rational human beings would want to know what does the absolute best scientific research have to say about my longevity, about how I can best go about beating this particular disease or whatever the condition is that I’m struggling with. And we look at investing as being really no less serious.

I mean, your capital, your savings, your balance sheet represents the sum total of your life’s work. And the way we think about it, having worked, we work at Mercer, we work with about forty three thousand families, Josh, across the United States. And there are many people counting on us, counting on our clients to get it right. And so that’s how we think about it.

We say, look, we don’t have to re recreate the wheel. There are PhDs the world over who’ve been studying this stuff for close to one hundred years now, candidly, at this point. And so with respect to factor investing, there is a very long lineage of Nobel prizes that have been awarded to academics who’ve really advanced the frontiers of financial science and how we think about risk and return being related. Just beginning with a professor by the name of Harry Markowitz at the University of Chicago, he wrote a very famous paper in nineteen fifty two on modern portfolio theory.

And he actually won the nineteen ninety Nobel Prize in Economic Sciences for that paper, and he and he shared that with William Sharp at Stanford, Merton Miller at the University of Chicago. So so beginning as early as nineteen fifty two, I wasn’t even born yet. Right? There were people researching these things and advancing the frontiers of financial science.

William Sharp, he he did a whole whole paper in nineteen sixty three on the on on what he coined the capital asset pricing model. He also won the nineteen ninety Nobel Prize in Economic Sciences. Gene Fama, one of my professors from the University of Chicago, Ken French, who was his longtime research partner coauthor who’s now at Dartmouth College, they well, Jean Fama won the nine the the the twenty thirteen Nobel Prize and shared that with three other faculty members. You know, Robert Novi Marx at the University of Rochester also did a significant amount of research on factor investing.

He has yet perhaps to win a Nobel Prize, we’ll see. But there’s others, Sunil Wahal and certainly other faculty members throughout academia who’ve done an amazing job using advances in computer technology, using advances in data science, who’ve really advanced, like I said, the frontiers of financial science and really our understanding around how best to go about building portfolios for families.

Now tell us about the different factors that this body of research has identified because we kind of defined it loosely before, but there’s actually very specific characteristics that we’re looking for. And so kind of walk us through what the kind of what those big specific things that we’re looking for, what that these that these strategies look for when they when they identify stocks.

Yeah. So for so just just to be clear, there there have been probably no fewer than six hundred factors that academics in their rush to achieve tenure have written papers on. But the vast, vast, vast majority of those all roll up under really four, and we’re to highlight those four here, Josh.

So the first is valuation. Value is just the price that you pay for something. And in this particular context, we’re talking about the price of a stock relative to some sort of intrinsic value. It could be earnings.

Like I said earlier, it could be the book value of the firm’s equity on its financial statements. In this case, that would be on the balance sheet. Right? So I think land and factories and things like that.

Right? Could be earnings, could be profits. We’ll come back to profits here in a moment.

But all things equal, you wanna pay the lowest price possible in order to access, as a shareholder, you have a legal claim to the company’s assets, to their earnings, to their cash, to their land, to their factories. So all things equal, Josh, you wanna pay the lowest price possible.

And so value

From an intuitive sense, these are like companies that are on sale.

Absolutely, right? I mean, is the irony, right? Is that investing, they say, is one of those when it comes to stock investing, it’s one of those areas where where people tend to chase the the high priced companies, right? Because those are like the shiny objects.

That’s not how you wanna approach this. You wanna approach this like you’re buying an automobile. You wanna get the best price possible, and naturally the best vehicle that you can for the dollars that you’re willing to spend. But that’s what value investing is all about. It’s looking for companies that are perhaps a bit unloved, right? Coming into the year, this year twenty twenty six, no one was lining up to buy stocks in very boring oil companies, right?

Right? Everyone was buying Nvidia. They were buying all the great tech companies that have done amazingly well here over the past three or four years.

And then lo and behold, due to a geopolitical conflict in the Middle East between the United States and Iran, what happens, we see these value stocks actually come into come into vogue. Suddenly everybody wanted to load up on value stocks. And so that’s what value stock investing is about.

Moving on, quality.

Sometimes we refer to quality stocks as highly profitable stocks. These are companies that setting aside the price for a moment are perhaps really worth the money. Right? Think of the Rolls Royce.

Like, look, you know you know you’re gonna pay a pretty high dollar amount to buy a really high end vehicle, but hopefully it has everything you need. It’s got the leather seats. It’s great on gas. It’s got the right look, the whole nine yards.

That’s how we think about quality stocks. These are companies with stable earnings.

What that means is they’re perhaps to some degree a bit immune on a relative basis to big shocks in the economy.

Right? Right. Think of think of things like, you know, we used to joke that like, you know, beer companies seem to do well no matter what. When times are good, people buy alcohol.

When times aren’t so good, people tend to buy alcohol. Right? So those are companies with stable stable earnings, but also consistent growth. Think of the AI trade at the moment.

A lot of these are companies that have amazing consistent growth in their revenues and in their earnings. So those are quality companies. You know you’re gonna pay up in order to access those types of stocks and add those to your portfolio. So these are companies, these are high quality companies that investors are gonna have to pay up to own.

And so you still have to do the arithmetic on this. You still gotta ask yourself, you know, are are are these things that these companies are doing, these amazing things in terms of stable earnings growth or rapid earnings growth, are they worth paying up for? Right? So there’s there’s a whole framework for how investors, sophisticated investors think about these things.

But quality companies have been shown over time to outperform companies of lesser quality. Right? So shock. Right?

Who would have known that profitability matters? If you’re a very profitable company, your stock will do better than a company that is less profitable. So a lot of this is pretty logical, Josh. It’s just that we have, I think as investors, we always think we can do better, but there are patterns here in markets.

And that’s what a lot of the science, lot of the real world data is showing.

In terms of these two other It’s logical,

but to touch on a point you’ve I’ve heard you make elsewhere, it part of the science was about identifying how you do it systematically.

So it’s not kind of it’s not kind of shooting from the gut that this is a stable company. It’s it’s how do you what what specific things are you looking for on a balance sheet that tell you that this is the case so that you can then do it systematically. I mean, that’s one of the most important points is that this is identifying a way to be systematic in identifying these things versus doing it as kind of shooting from the hip.

Absolutely. And it’s about really identifying and building and sustaining a repeatable process to how you build and manage portfolios, right? So that’s what all of these factors are about. And the last two, the third is momentum.

All of us in our lives, Josh, have experienced momentum. Whether it’s Cabbage Patch Dolls from those of you as old as I am from the eighties or Beanie Babies or fidget spinners, right? We or real estate in the mid 2000s, right? Everybody thought they were gonna get rich flipping condos in Las Vegas, right?

Back in the mid 2000s. So momentum is this observation that we see in asset prices that objects in motion tend to stay in motion. And so what we observe is that companies that have outperformed recently tend to continue to outperform for a period of time. Not in perpetuity, not forever, but going forward for several months tend to continue to outperform.

So that’s momentum. Last but not least is that stocks with smaller market capitalizations. What do we mean by that? These are just smaller companies.

That’s all. Right? You’ve got really, really big companies like now SpaceX, right? A multi trillion dollar company, right?

Think of Amazon, Apple. These are multi trillion dollar companies. But there was a time when Apple was not a multi trillion dollar company and it was a very small company.

And so what we observe when we look at all of the data is that smaller companies over time tend to outperform much bigger companies. And there’s a host of reasons perhaps that explain why that’s the case. They’re more nimble, they can move quicker, they can enter and exit markets perhaps a lot quicker than some of these very large companies that have a lot of expenses and a lot of staff and things and things like that.

And so Yeah.

Go ahead.

Yeah. One of the key things to note here, right, is that this is not every single day, every single week, every single month that these things outperform. That’s not the idea at all. But what this next data that we’re gonna put up shows is that over long periods of time and even more, you know, the longer you go, the more it’s the case, these tend to to be the stronger performer.

Absolutely. You know, earlier one of the things I said, Josh, is that there’s two things at a high level that investors and advisors should look for. Number one is a magnitude of outperformance. We already touched on some of that data.

I think we’re gonna bring some more of it back here in a moment. The second is the frequency. How often does the strategy outperform? And just to remind our listeners, when we started our conversation and we were looking at these traditionally active managed mutual funds, what we observed is that in any one year period, about twenty percent of them outperformed their benchmark, the S and P five hundred index.

When you look at something like value stocks, we’re talking about factor based investing.

Value stocks actually outperformed non value stocks, which are actually called growth stocks.

Value stocks actually outperformed fifty nine percent of the time.

Right? So let’s, Josh, we’re gonna go through an exercise here for a moment. We’re gonna pretend you and I are in Vegas. Right? And there’s one blackjack table where you have a fifty nine percent probability of winning.

And there’s one right next to it where you have a twenty percent probability of winning.

Where are we gonna sit down at and play cards?

Especially if we’re gonna be playing continually for the rest of our lives.

And that for our listeners who can see our slide, that’s where the magic happens.

With factor investing, what we observe is that as time goes on over five years, for example, value stocks outperform sixty nine percent of the time. What we observe is that the probability of outperformance increases with time. It does not decrease. Remember that with our traditional active managers, what we observed is that their probability of outperformance decreased with time. Their odds of winning, performance got worse with time. It did not improve.

With factor investing, what we observe is that our odds continue to improve with time such that by after ten years, value stocks have about a seventy seven percent probability of outperformance and over fifteen years an eighty six percent probability of outperformance. And this is data that goes all the way back to the 1920s. Right? So again, not cherry picking data here. We’re looking at all of the market data and using that to derive some lessons to look for patterns that are these repeatable patterns, Josh, that we’ve been talking about.

And so we talked about how frequently this is the case. We can also talk about the magnitude of it. How how much has it outperformed? And we can see that here. This is a chart that that shows three of these and it shows it both for the U.S., for developed economies aside from the U.S., and from emerging markets. And what do we see here, Don?

What we see, Josh, is this same pattern.

These same factors, whether it be valuation, sometimes referred to as relative price, you can see that term here on the slide, profitability is quality, right? Academics use some different terms for these things.

But what we observe is the same exact factors than the outperformance associated with these factors, that it is pervasive.

It’s these factors and the outperformance, it manifests itself not just in the United States, but in Canada, in Western Europe, in Asia. And what we also observe is that outside of the United States, that the outperformance is actually greater than it is in the United States. Josh, I just think that’s because U.S.

financial markets are the most brutally competitive financial markets in the world. When you go into other markets where there’s perhaps less buyers, less sellers, less investors, less information, that there’s an opportunity there to earn a little bit more, for example, in emerging markets. And so when we look at profitability, for example, in emerging markets, we see that the excess return, that additional outperformance associated with highly profitable companies in emerging markets is a solid four percent. When we look at valuation, it’s close to five percent in emerging markets.

So there’s very significant evidence that these factors are pervasive and the outperformance is actually greater outside of the United States.

Now one of the things that you said at the beginning that we probably want to explore just to touch here is you said that we take a multi factor approach. And so kind of explain how in practice we actually implement this. If there’s, you know, if there’s because a a company could have a little bit more value than quality going on. It could be it could be big and have quality. And so kind of how do you incorporate these different things into an actual strategy?

Yeah, the mistake that I’ve heard investors make after they hear someone speak about factor investing is they say, well, wait a minute, you know, momentum let’s say has outperformed the other three factors. I’m gonna put all of my money into momentum.

Horrible mistake. Same thing with value or profitability. There is wisdom in combining all of these factors together when building a portfolio. And I’ll give you a classic example that a friend of mine, Eduardo Repetto, who’s the Chief Investment Officer at Avantis, often heard him make reference to gas station quality sushi.

Now I love sushi. I imagine many of our listeners enjoy eating sushi. But I don’t know that I would buy it from a gas station. It may be very inexpensive.

But that’s value.

That’s value, right? So you can find some really good values on sushi at a gas station in the middle of the night in Western Nebraska. I’m sure you could. I just don’t know that you’d want to, the quality of that sushi may be questionable.

So we apply that same thinking to companies. There are companies, for example, that are just really struggling and their stocks may be really, really cheap for a good reason. Could be that they have poor management teams. It could be that they are in dying markets.

Think of a company like Sears. I remember Sears in the mid two thousands was in serious trouble. You know, their CEO wasn’t a great CEO. He was really struggling, I think, with the role.

And Sears stock was really cheap. Sears today does not exist, right? So a company could be cheap for really good reasons. At the same time, there could be a company that’s doing amazingly well.

Think of a company like Apple.

And you know, great products, great earnings, great profitability, but the stock price is just trading at nosebleed levels.

And so what you really wanna do is you really wanna combine these factors together so that you can get a really great holistic look at a company. And then from there, determine whether or not it’s something to add to a portfolio. And Josh, I’ll say one last thing on this. It’s not like stocks are born with a tattoo on their forehead that says that they are a value stock or a highly profitable stock.

Right. Are companies generally exhibit all of these different factors to varying degrees. And that’s what you really want to do is you want to identify companies that are both inexpensive, but also highly profitable. And when you do those sorts of things, what we observe is that you outperform over longer periods of time.

When you do it systematically, when you do it over time, that’s kind of the secret.

Well, Don, wrap this up for for us. What are kind of your three takeaways as you that you want people to come away with having listened to this, that you want people to understand about kind of how their own portfolios at Mercer Advisors are invested?

Well, I think first, Josh, is is one that we are fiduciaries. And what that means to us is that we have an obligation to our investors who have entrusted us with their capital. And when we do that, we’re going to take a scientific approach to how we manage that capital. To us that is just very logical, right?

So number one, we’re fiduciaries and as fiduciaries we take an evidence based approach to investing. Number two, there is nothing wrong with passive investing. Indexing Indexing is a great approach to building a highly diversified low cost portfolio. It’s an outstanding starting point.

And at Mercer Advisors, we have many portfolios that have allocations to index funds and indexed type stock strategies and so on and so forth. So that is a great starting point for building a portfolio. There is danger, however, in our opinion, in stopping there. The danger being that you’re probably leaving returns on the table.

We think that you can do better, which brings us to our last talking point. Factor investing, the science of investing backed by more than eight decades of Nobel Prize winning research. Factoring investing is a systematic, rules based approach. It’s transparent.

Factors are nothing more than financial metrics that you can pull right off of a company’s audited financial statements. So factor investing, it’s a systematic rules based approach to being an active investor, right? We are still active, but we’re doing it in a rules based systematic approach that is backed by more than eight decades of academic research.

And it’s that factor based lens that we use to help us diversify portfolios within asset classes.

The one final point I would just make here is that building a portfolio of only five stocks perhaps, or twenty five or fifty stocks that exhibit these factors, that would be a mistake. We are still talking about building highly diversified portfolios both within and across major asset classes. So a well diversified multifactor portfolio should still own many, many hundreds, I would argue actually thousands of global stocks in the portfolio that is tilted towards these different factors that we’ve discussed here today, Josh.

Don, thanks so much for being here with us today to discuss this.

It’s been fun. Thank you, Josh.

If you’re already a Mercer Advisors client, there’s a good chance you’ve already thought about some of this, but we hope you found this helpful. Obviously, reach out to your advisor if you have any questions, want to discuss it more. If you’re not a Mercer Advisors client, but you’re interested in more information, you’re interested in how you might implement this in your personal financial plan, don’t hesitate to reach out. Go to our website, merceradvisors.com. It starts with the phone call. Thank you so much for being with us today on Market Perspectives.

This presentation by Mercer Global Advisors Incorporated also known as Mercer Advisors was intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Mercer Advisors. All expressions of opinion reflect the judgment of the speaker as of the date of recording and are subject to change.