Investment Philosophy
One of our goals in creating TriHelix is to bring a scientific lens to investment management while keeping things easy to understand and accessible. The investment world is overflowing with strategies and jargon—qualitative, quantitative, active, passive, hedged, leveraged—the list goes on. We do not believe in buzzwords, nor do we believe we are the smartest people in the room. What we do believe in is using the approach that has the most research to support it.
Modern Portfolio Theory
Modern Portfolio Theory is the brainchild of Harry Markowitz, going all the way back to 1952. Markowitz observed that investors care more about the overall risk of their portfolio than squeezing the highest possible return out of any single investment. This led to the creation of the Efficient Frontier, which maps out the return an investor should expect at various levels of risk.
The Efficient Frontier is like tailoring a treatment plan for a patient—balancing the benefits (returns) against the side effects (risk). No two patients need the same dosage, just as no two investors need the same allocation.
The Efficient Market Hypothesis
If we fast forward a decade or so, we meet one of our favorite people: Dr. Eugene Fama. While working toward his PhD, Fama developed the Efficient Market Hypothesis (EMH). His work showed that there is no cheat code to win at investing. Asset prices fully reflect all available public data, which means that attempting to pick stocks or time the market will not produce higher returns. The best way to invest, therefore, is to own a broad basket of stocks.
Stepping away from academia for a moment, Fama’s work led directly to the best tool we have at our fingertips: the index fund (and later the ETF). The first index fund was pioneered in the 1970s by John McQuown and colleagues, inspired by Fama’s research. A few years later, Jack Bogle took the idea mainstream, founding Vanguard and making index funds accessible to everyday investors.
The EMH is like peer-reviewed medical research—once the evidence is published, it’s available to everyone. There’s no secret “miracle cure” hiding out there, just like there’s no undiscovered trick for consistently beating the market.
The Three- and Five-Factor Models
The final piece of our academic trio also features Fama, this time alongside Kenneth French. Their Three-Factor Model took investing theory a step further. The original Capital Asset Pricing Model (CAPM) said an asset’s return was dictated solely by its sensitivity to overall market risk. In the early 1990s, Fama and French pored over decades of financial data and found something missing.
When they dug deeper, they discovered two more factors were needed to explain returns:
Size: Smaller companies tend to outperform larger ones.
Value: Companies trading at lower prices relative to fundamentals (so-called “value” stocks) tend to outperform their higher-priced “growth” counterparts.
In 2015, they expanded their model again, adding:
Profitability: Companies with higher profits tend to outperform less profitable peers.
Investment: Companies that reinvest conservatively tend to outperform those that aggressively expand.
The Five-Factor Model is like running a full lab panel instead of just a single blood test. CAPM was like checking blood pressure alone; Fama and French showed that we need more markers—size, value, profitability, and investment—to get a complete picture of portfolio health.
(More on this in our blog about our use of Dimensional Funds [LINK].)
What It Means for TriHelix & Our Clients
Phew, that was a lot! So what does it all mean for the way we manage client portfolios? How do the Efficient Market Hypothesis, the Efficient Frontier, and the Five-Factor Model actually guide us?
It means that our investment philosophy is intentionally pretty boring:
Modern Portfolio Theory reminds us that, no matter what our parents say, we don’t need to be the smartest people in the room. Instead of trying to outguess the market, we focus on evidence-based portfolios—keeping our fees lower than industry standards.
The Efficient Frontier helps us build portfolios appropriate for each client’s timeframe and return needs. This informs the exact asset allocation to ensure portfolios are well-diversified and tailored to client goals.
The Five-Factor Model helps us understand the best way to screen for assets with higher expected returns and to separate skill from exposure. This allows us to tilt portfolios toward factors that have historically offered premiums, without paying higher fees for active funds or stock picking.
