Our investment partners

Here it is: the first Triple Partners investment letter. We will send you one every quarter. In these letters we intend to share some of the lessons we have learned from reading ‘boring’ academic studies and books about investment history. Our challenge will be to make these interesting for you, which we intend to accomplish by keeping them short and hopefully simple.

As you know our goal is to offer a well-balanced, disciplined ‘Investment Solution’, which is broadly diversified both within and between asset classes. To be able to do this cost effectively, we have selected investment partners who can achieve efficient diversification within the asset classes we have selected, and do this in a manner that is wholly compatible with our investment philosophy. In this first letter we would like to tell you a bit more about our investment partners so you understand why we have chosen them to help us implement the Solution.

Introduction

Let’s start with some history: the late 1960’s saw the first of many empirical studies looking into the performance of mutual funds. It turned out almost no actively managed fund was able to outperform the market average if corrected for the risk taken and for chance. ‘Corrected for chance’ is an important qualifier. There were and still are funds that show outperformance. Similarly, when a thousand people throw-up a coin ten times, chances are one person will throw heads ten times in a row. This does not mean this person is a skillful coin thrower. It is merely a logical result of statistical probability. Unfortunately until this day many investors, enthusiastically supported by the media, still mix up luck and skill.

Four wise investment pioneers took these discoveries to heart and started the first of a handful of index funds in the mid ‘70s, each at a different firm. As tends to happen with pioneers, they soon decided to start their own businesses, leading to the birth of Dimensional Fund Advisors, Vanguard and GMO. Although each firm took a somewhat different direction, each of them remembered the important lessons from the empirical studies. All three have stayed true to their disciplined, diversified and low cost investment approach for over three decades. Incidentally all of them have also offered superior returns to their investors during this period.

Many of the topics we covered in ‘The Investment Illusion’ are based at least in part on the lessons and research done by these firms and the academics they work with. So when we needed to decide how to translate our research into actual investments, the choice was actually quite easy: what better option than to work with those who teach what we preach? We decided to spread our investments across these managers and intend to stick with them for many years ahead.

Investment partners

Below we have given a short synopsis of the history of these three firms. In subsequent investment letters we will discuss each of them in more depth.

Dimensional Fund Advisors

DFA was founded in 1980 by David Booth and Rex Sinquefield. Mr. Sinquefield had originally intended to become a Catholic priest, but left the seminary for the University of Chicago MBA program. Years later, he said that he was just 10 minutes into his first class with the late Merton Miller (who would later win a Nobel Prize in economics) when the first seeds for setting up an index fund were planted in his mind. Sinquefield met Booth when studying at Chicago under Gene Fama, also known as ‘the father of modern finance’. Booth and Sinquefield parted ways when they finished their studies and independently started the first index funds at Wells Fargo (Booth) and American National (Sinquefield).

They joined forces again in 1980 to start DFA, which offered the first small company index fund and kept a close alliance to the academic environment where they first met. Their old professor Fama became head of research for DFA and the DFA board is a veritable who’s who of modern finance. It includes Kenneth French of Dartmouth (who was Fama’s research partner), Roger Ibbotson of Yale and Myron Scholes, the Nobel laureate in economics who teaches at Stanford.

Their research showed amongst others that it pays to take risk: in the long run equities perform better than bonds, small-caps perform better than large company stocks, and value (‘cheap’) stocks better than growth stocks. In each instance, it’s primarily because they are more risky. It also showed that index investing is not necessarily the best way to track these asset classes, as transaction and market impact costs can become prohibitive if you are not focusing solely on large cap stocks. They stuck to their passive principles, but found a way to improve on index investing by being more rigorous about diversification, but more flexible about which individual stocks to invest in and when to buy. As Fama puts it: The best negotiating position is not having to buy anything – and that goes in every aspect of life”. In the process they developed the most reputable passive investment company in the market.

DFA does not offer its funds directly to individual investors, but only via a select group of advisors, who share their investment philosophy and have gone through a rigorous due diligence and training program. Despite this restriction, or maybe because of it, they now manage more than $ 160 billion in assets. Triple Partners is the first approved ‘advisor’ in the Dutch market.

Vanguard

Vanguard was founded by John Bogle in 1974. Under his leadership, the company became the largest mutual fund company in the world, with current assets under management in excess of $ 1.3 trillion. Mr. Bogle started the first index mutual fund for retail investors, the Vanguard 500 Index Fund, in 1975. Vanguard is owned by its clients and profits are used to decrease management fees. As a consequence of this structure the average cost of their funds is 1/6th the cost of their peers (the Vanguard S&P 500 Index fund for example has a total expense ratio of 0.07% annually). Mr. Bogle is the most recognized voice for index investing. He has written several bestsellers on investing and Fortune Magazine named Bogle one of the four “investment giants” of the twentieth century (together with Warren Buffet, George Soros and Peter Lynch).

GMO

GMO was founded in 1977 by Jeremy Grantham, together with Richard Mayo and Dutchman Eyk van Otterloo. Mr. Grantham was the first to present the idea for an index fund at Harvard in 1971. He attracted his first index client at Batterymarch in 1974. The main thing that has gripped Mr. Grantham over time is the fact that investors have been surprised over and over again by investment bubbles. In Mr. Grantham’s view excessive valuations in asset prices (‘bubbles’) will always disappear over time, we just don’t know when. Since index funds will not be able to avoid these bubbles GMO has developed a more active approach to avoid overvaluation, by focusing on drivers of fundamental returns and ignoring market sentiment. Most of GMO’s funds, including the ones Triple Partners invests in, are only available to institutional investors, which enables them to keep costs relatively low.

GMO’s active risk management approach is the odd exception in our otherwise passive portfolio. However, their disciplined and long term approach to risk management, together with the low cost of their institutional funds, leads us to believe that it adds value to our investment portfolio. Not unimportantly, GMO has 30 years of proven track record to support that belief.

In short

These three asset managers share our investment philosophy of discipline, diversification and low cost, like no other. Out of the many funds they offer, we have selected the ones best suited to our goals. Where needed we use other reputable firms to complete the broad asset allocation for our Core Portfolio. The result is a globally diversified pool of shares from around 9,000 underlying companies, short term bonds from 100 high quality counterparties, over 100 real estate investment companies and a diversified group of precious metals mining companies. We also hold a small portion of our portfolio in physical gold.

We wish you a lot of investment peace of mind,

Marius & Jolmer

The websites of our investment partners: