News

16 July 2015

Fama and French Q&A

Risk and reward are inextricably linked. Decades of financial research provides insight into these risks. A scientific model developed by world-renowned financial economists Eugene Fama and Ken French shows that some risks are worth taking; others are not.

In this interesting Q&A published in Barron’s magazine, the pair discuss a recent Nobel Prize win and their theory of market efficiency.

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Fama & French believe that the performance of your investment portfolio is largely down to three risk factors: how much you have in stock markets, and how much you have in two classes of shares – ‘small’ and ‘value’ companies. Fama and French’s ‘Three Factor Model’ proved that these shares do better than the market overall, so Carbon’s portfolios have a bias to these stocks to capture the additional return they deliver.

Stock-picking and market timing introduce a lot of extra cost and account for a very small proportion of returns. These are the areas where most advisers spend the majority of their time. Markets work, so we don’t try to pick shares or managers, or the best time to enter or exit markets: you are not rewarded for the extra risk this introduces.

We don’t pretend to have a crystal ball to tell us what the future holds – we don’t accept this in any other aspect of our lives, so why should we think it works with investment? We take the minimum risk required to achieve the target returns you need to meet your objectives.

You can find out more about our philosophy here.

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