What is Evidence based investing?
Author: Ash Weston, 8AM Global
More recently ‘Evidence based investing’ has become something of a catch-all term that has been applied to a variety of investment propositions. Its a real bugbear for us at 8AM, as clearly all investment products and strategies must include aspects of research, evidence and objective truth. Whilst it gets the headlines – investment managers are not usually attempting to divine the potential earnings trajectory of a sector based on tea-leaves and Shakra’s!
As Ash Weston, Head of MPS at 8AM stated to FT Adviser in November 2024, “All investing is based on evidence.” Read the full article here.
Still, these headlines have led many to becomes confused as to what ‘evidence-based-investing’ actually is. And importantly, whether it is relevant for their clients.
Is it a complex approach?
It’s generally accepted that evidence-based investing aims to remove subjective assumption and psychological bias from the investment process. It seeks instead to rely on the output from academic studies of how markets have performed over long periods of time. It is (usually) based on robust data and a lot of randomised scenario testing, and often takes the form of ‘passive investment with an active overlay’.
Many advisers are now looking for an alternative investment approach having had historic success with more active investments within Model Portfolios and then seen a period of poor, relative performance in 2022, with many being unable to subsequently capitalise on trends in 2023 and 2024.
Value remains within active funds and proper evidence-based investing should incorporate both active and passive investment styles as supported by the data. In terms of building a portfolio of assets, we don’t believe in the concept of predicting holdings that are about to deliver a strong term performance. Our qualitative analysis uses a rules-based framework, driven by data to select and monitor funds and provide crystal clear reporting for you.
The 8AM AQ process is dispassionate and reviews all funds and ETF’s in every relevant IA sector. Acceptable funds are those providing the right balance of consistency and alpha and form our top decile. AQ then automatically reviews for potential replacement any existing holdings that may fall into the second decile. Our ‘red flags’ are simple – if a fund falls outside the top 20% then it’s replaced.
Passive investing has been growing in popularity, but evidence-based investing is not just a low cost ‘passive only’ proposition. However, the 8AM AQ MPS does make extensive, appropriate use of passive investment funds when screened by AQ or as a. strategic complement to the primary ‘AQ driven’ equity sectors within the models. Whilst the use of Passive fund exposure has the positive effect of keeping our portfolio costs low, their application is a key foundation of the rolling AQ MPS portfolio optimisation process – keeping portfolio liquidity as high as possible to enable rapid response and seamless portfolio turnover. One of the key strengths of our strategy is to respond and adapt quickly to changing market conditions – hence the ‘Adaptive’ part of the ‘AQ’ acronym.
Evidence-based investing is a long-term approach, but the consistency and clarity of our optimisation process, combined with the explainability of decision-making, and the low costs of implementation make it an appropriate and attractive option for many advisers and their clients.
This content is intended for financial professionals only. These are the author’s views at the time of writing and may be subject to change. This content is not intended to provide the basis for any investment advice or recommendation. Any forecasts, figures, opinions, tools, strategies, data, or investment techniques are included for information purposes only.
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