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INVESTMENT STRATEGY

Our approach to investment management is informed by three specific theories: Efficient Market Hypothesis, Modern Portfolio Theory, and the Three-Factor Model.

1. The Efficient Market Hypothesis

Financial markets are full of smart people making rational decisions. We believe that, as a consequence, most stocks are appropriately priced and little is to be gained by sniffing out underpriced stocks, blindly following fund managers who have had successes in the past, or trying to predict the inevitable ups and downs of the markets. The Efficient Market Hypothesis comes from University of Chicago economist Eugene F. Fama, winner of the 2013 Nobel Prize in economics. Here is how he puts it: An efficient market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market, at any point in time the actual price of a security will be a good estimate of its intrinsic value. We believe the best predictor of your success as an investor is old-fashioned research and market fundamentals. For you as our client, this approach means four things: We will clearly define an investment statement based on extensive research of the financial market, not on media reports, advertisers, or sales pitches. You need to understand that most media outlets view the markets as inefficient. You must decide if you believe the markets are efficient or not. Your view on market efficiencies will guide your investment statement.

2. Modern Portfolio Theory

Modern Portfolio Theory is designed to maximize the returns that a portfolio will bring for any given risk, or, conversely, minimize the amount of risk for any given return. The theory earned the 1990 Nobel Prize in Economics by the collaborated work of Harry Markowitz, Merton Miller, and Myron Scholes. Besides working to minimize risk while maximizing return, Modern Portfolio Theory is marked by its attitude toward diversification. Diversification can be used to design a collection of assets that retains the potential return of an individual asset while lowering overall risk. Diversification may also help increase returns while lowering risks, but there is no guarantee of this.

3. The Three-Factor Model

The Three-Factor Model was the brainchild of Eugene Fama and his University of Chicago colleague Kenneth French. Working from the Efficient Market Hypothesis, they concluded that the lion’s share of a portfolio’s performance grew from three factors:

The Market Factor: Stocks versus fixed income.

The Size Factor: Small-cap stocks over large-cap stocks.

The “Value” Factor: High book-to-market over low book-to-market stocks.

Conclusion

No investment strategy can guarantee that you will always gain money and never lose money; disappointments happen in investment markets just as they do in life. But there is much that we can do to help ensure that your investments bring you the future that you envision for yourself. At Heritage Investors, we base our approach on information, both the information that comes from an in-depth exploration of market fundamentals and the theoretical understanding that helps us make the most of those fundamentals. We want you to understand the theoretical framework that drives our investing approach. We believe that by leaning on some of the brightest minds in economics and the financial industry, we have created a proven, intellectually sound approach to making the most of your portfolio.

investing approach. We believe that by leaning on some of the brightest minds in economics and the financial industry, we have created a proven, intellectually sound approach to making the most of your portfolio.