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An Innovative Approach

Our Approach Is Not Based On Speculation 

But On The Science Of Capital Markets

 

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An Innovative approach

Our investment philosophy strictly adheres to the following core principles:

  • Risks and returns are interrelated
  • Small caps have a higher expected return than large caps
  • Cheaper value stocks have a higher expected return than more expensive growth stocks
Why does active vs. passive debate matter?

The past teaches us that it is practically impossible achieving consistently higher returns on a long-term basis by market timing and stock picking.

Nevertheless, market-timers and stock-pickers try to obtain an outperformance by foreseeing rising or falling share prices or by trying to identify under- or overvalued stocks.
Statistics fro Standard & Poor’s show that these performances ultimately turn out to be disappointing when compared with market returns.


Because we cannot
predict the future, 
we diversify. 

PROF. PAUL SAMUELSON 
Nobel Prize in Economic Sciences, 1970
SPIVA EUROPE SCORECARD: YEAR-END 2019

Percentage of European Equity Funds Outperformed by Benchmarks

Fund Category Comparison Index One-Year Three-Year Five-Year Ten-Year
Europe Equity S&P Europe 350® 71.12 79.37 77.54 87.05
Eurozone Equity S&P Eurozone BMI 78.80 91.15 89.15 90.68
France Equity S&P France BMI 90.05 99.10 92.00 90.09
Germany Equity S&P Germany BMI 57.29 68.48 76.04 83.17
Global Equity S&P Global 1200 81.56 87.54 94.06 98.29
Emerging Markets Equity S&P/IFCI Composite 50.14 80.12 88.65 96.15
U.S. Equity S&P 500 81.20 86.67 92.58 98.21

Source: S&P Dow Jones Indices LLC, Morningstar. Data for periods ending Dec. 31, 2019. Outperformance is based on equal-weighted fund counts.
Index performance based on total return. Past performance is no guarantee of future results. Table is provided for illustrative purposes.

Harry M. MARKOWITZ was awarded the Nobel Prize in Economic Sciences for his work on optimal diversification. He argued that much higher returns can be achieved by controlling risk.

To guarantee long-term asset growth, investors need to maintain an optimally diversified portfolio, according to MARKOWITZ’S theory. 

Practice smart diversification
HOME MARKET INDEX PORTFOLIO GLOBAL MARKET INDEX PORTFOLIO

Eugene F. FAMA, Nobel Prize in Economic Sciences 2013, from the University of Chicago Booth School of Business and Kenneth R. FRENCH from Dartmouth College observed that two types of stocks, small caps and value caps, tended to perform better than the market as a whole. Their research findings have provided a better understanding of the factors that drive asset management performance.

S & P 500 INDEX

1928-2020

Data provided by
Standard & Poor‘s Index Service Group

S & P 500 INDEX

dimensional us large cap value index

1928-2020

Index data compiled by Dimensional.

dimensional us large cap value index

dimensional us small cap index

1928-2020

Index data compiled by Dimensional.

dimensional us small cap index

 

Overweight asset classes with higher expected return

This figure shows the historical return advantage of small stocks over large and value stocks over growth. Small company stocks are riskier than large company stocks, and have therefore delivered a higher return. Value stocks have low prices relative to their underlying accounting measures such as book value, sales and earnings. Growth stocks have high stock prices relative to their underlying accounting measures. The size and value effects are strong around the world.

ANNUALISED RETURN(%)
US Large Capitalisation Stocks ($)
1927-2020
US Small Capitalisation Stocks ($)
1927-2020
Europe ex UK Capitalisation Stocks (€)
1981-2020
UK Capitalisation Stocks (£)
1975-2020
Emerging Markets Capitalisation Stocks ($)
1990-2020

Historical returns around the world; Annual data; % per annum
Source: dimensional

No Market Timing, No Speculation, But Rebalancing

Randomness of returns. No one knows which markets will outperform from year to year. By investing in a diversified portfolio you capture returns wherever they occur. Maintain a fixed asset allocation through rebalancing.

Annual Returns in EUR   2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
MSCI WORLD INDEX (NET DIV.) Highest
Return
37% 0% 22% 32% 22% 22% 23% 20% -4% 30% 9%
MSCI EUROPE INDEX (NET DIV.)   28% -2% 17% 22% 19% 10% 15% 10% -6% 26% 6%
MSCI USA SMALL CAP INDEX (NET DIV.)   25% -8% 16% 22% 13% 8% 11% 10% -6% 26% 6%
MSCI JAPAN INDEX (NET DIV.)   24% 10% 15% 20% 11% 7% 11% 9% -9% 22% 5%
MSCI EMERGING MARKETS INDEX (NET DIV.)   20% -12% 14% 1% 9% 2% 6% -11% -11% 21% -2%
MSCI PACIFIC EX JAPAN INDEX (NET DIV.) Lowest
Return
11% 11% 6% -6% 7% -5% 2% -11% -11% 20% -3%
Structure of the enhanced index investing equities sub-fund and impact of diversification on returns and risk.

This example demonstrates the positive impact of optimal diversification on the fund’s performance and volatility. By investing 100% in Example 1, the annualised performance over the period is +4,01%  with a volatility of 15,44%.

Example 2, which is more diversified, offers a better return over the period, with no significant increase in volatility.

Examples 3 and 4 show the same trend. Each time we increase the level of diversification, we note an improvement in returns. 

For our Enhanced Index Investing Equities sub-fund, we have taken this argument to its logical conclusion to achieve a maximum return, while maintaining a similar level of volatility to Example 1.

The need for a well-diversified investment portfolio is a prudent principle and a key component of our investment philosophy.

We aim to provide the best framework for your optimal asset allocation.

monthly : 01/1999-12/2020; in Euros EXAMPLE 1 EXAMPLE 2 EXAMPLE 3 EXAMPLE 4 EXAMPLE 5
MSCI EUROPE INDEX (NET DIV) 100% 50% 40% 30% 13%
MSCI EUROPE EX UK INDEX (NET DIV)         14%
MSCI EUROPE SMALL CAP INDEX (NET DIV)     6% 10% 8%
MSCI EUROPE VALUE INDEX (NET DIV)     7% 16% 20%
MSCI EMERGING MARKETS INDEX (NET DIV)   20% 20% 17% 10%
MSCI EMERGING MARKETS VALUE INDEX (NET DIV)         10%
MSCI PACIFIC SMALL CAP INDEX (NET DIV)         6%
MSCI USA SMALL CAP INDEX (NET DIV)     3% 6% 6%
MSCI WORLD INDEX (NET DIV)   30% 24% 21% 13%
TOTAL 100% 100% 100% 100% 100%
ANNUALISED PERFORMANCE 4,01% 5,80% 6,20% 6,35% 6,49%
ANNUALISED STANDARD DEVIATION 15,44% 15,21% 15,51% 15,72% 15,73%
  EXAMPLE 1 EXAMPLE 2 EXAMPLE 3 EXAMPLE 4 EXAMPLE 5

 

The structure is the strategy

Investors seeking greater expected return may increase their equity exposure while keeping liquidity and their bond portfolio short. Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns. 

For conservative investors, workers nearing retirement, and anyone looking to stabilize their portfolio during times of market volatility, the structure of their portfolio is the strategy. 

Therefore, we created a bond fund based on two main factors. Term (Longer-term bonds are riskier and have higher expected returns than shorter-term bonds) and Credit (Lower credit quality bonds are riskier and have higher expected returns than higher credit quali
ty bonds). Our goal was to combine all this dimensions to reach the best risk/return profile. 

By owning a mix of both funds, every investor can perfectly diversify his 
portfolio in respect of his risk tolerance. 

PERFORMANCE OF A DIVERSIFIED PORTFOLIO 50% EQUITIES; 50% BONDS

We created two sub-funds: an equity sub-fund, as it makes sense to invest a portion of a portfolio in asset classes with higher expected returns, and a bond sub-fund, to reduce the portfolio’s overall volatility.

As an independent asset management company, Tareno (Luxembourg) S.A. will offer you the best possible advice to help you achieve an optimal balance between equities and bonds, while taking into consideration your risk tolerance, your liquidity needs and your investment horizon.

This is where index investing comes into its own, as it allows for considerable flexibility in the review process. Your advisor’s role is to ensure strict compliance with the asset allocation implemented and to closely monitor your risk spread over time.

The example on the next page illustrates the relative performance of a diversified Tareno portfolio, invested 50% in equities and 50% in bonds, compared to its benchmark indices. (The REX 3Y index represents 3-year German Government Bonds)

 

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