Advanced Factor Investing vs. Index Investing
I am often asked how the public market strategies we employ at BIP are different from index investing. Prospective clients will say, “Why shouldn’t I just buy a bunch of Vanguard funds? Isn’t that the same thing you are doing at BIP?”
The answer is a resounding NO! We are NOT Index Investors, we are Advanced Factor Investors.
Index Investing is an investment strategy that seeks to hold all the securities of an index (e.g. the S&P 500) in the exact proportion that they are included in the index. The ultimate goal of index investors is to replicate the exact returns (i.e. zero tracking error) of a benchmark index. While we consider index investing to be a material evolution in public market investment strategy, our approach – factor investing – is yet another level of evolution.
Factor Investing incorporates a greater level of financial sophistication. Factor Investing uses mathematics and statistics to analyze the empirical predictive power of certain factors (proxies) such as dividend yield, book-to-market ratios, price-to-earnings ratios and company size to forecast the relative expected return and risk of a security. It also looks at factors such as momentum and transaction costs to optimize portfolio management. Advanced Factor Investing then takes these empirical findings and incorporates them into an investment strategy that can be replicated over and over again in a portfolio to extract an investment advantage. And the proof is in the pudding.
Our philosophy is rooted in the Nobel-winning research of Eugene Fama and financial icons Ken French and David Booth. The company they have created – Dimensional Fund Advisors (DFA) – is a shining example of connecting everyday people to the highest level of intellectual pursuit and financial science. BIP’s DFA-centric strategy has given our clients access to funds that consistently perform in the top quartile of available funds in an asset class and that consistently outperform Index Funds.
We invite you to contact us to learn more.