What Does an Investment Firm Believe?
Every investment firm has a stated philosophy and process. At its core, this philosophy explains how the firm believes markets work, what drives returns, and—perhaps most importantly—where they believe their edge lies.
For active managers—those aiming to outperform benchmarks or peers—the ability to clearly articulate these beliefs is critical. Without it, investors can’t fully understand what they’re paying for, or whether the manager’s approach is truly differentiated.
One visible expression of these beliefs comes through Capital Market Assumptions (CMAs). Simply put, CMAs are forecasts of expected returns for various asset classes over a set period of time.
The Easy Way Out vs. True Belief
Unfortunately, many firms take the easy way out by relying solely on historical returns. The problem? Assuming the future will look exactly like the past is hardly a belief at all—it’s a shortcut.
If an “active” manager defaults to history without building a thoughtful forward-looking view, it raises questions: what do they truly believe about markets? And if their costs are higher than a passive benchmark-like strategy, why pay the premium? Investors deserve more than that.
Breaking Down Returns
At the most basic level, investment returns come from three sources:
- Current yield (such as dividends or interest).
- Growth of that yield (often tied to earnings growth).
- Changes in valuation (how much investors are willing to pay for those earnings or cash flows).
CMAs can incorporate these drivers through a variety of lenses—fundamental factors like earnings growth, technical factors like price momentum, or valuation-based measures that blend the two.
A Nuanced Approach
Of course, not every manager builds CMAs with absolute return forecasts. Many instead use relative attractiveness—comparing opportunities across markets or asset classes. This is a reasonable approach, too. The key is that it still reveals what the manager believes about return drivers and how they translate that into portfolio construction.
Why It Matters for Investors
At the end of the day, CMAs are more than numbers in a chart. They represent a firm’s worldview. They show how a manager interprets markets, what they prioritize, and how they make investment decisions.
For investors and advisors, understanding these assumptions is essential. They’re the foundation for setting expectations, building portfolios, and evaluating whether a manager’s beliefs align with your own.
For those interested in exploring an example, Research Affiliates’ Asset Allocation Interactive is an excellent, free resource. It provides a clear and interactive way to see how capital market assumptions come to life.
Final Thoughts
An investment firm’s philosophy isn’t just marketing—it’s the backbone of how it invests. If a manager can’t clearly explain what they believe and how they apply it, it’s worth asking whether they truly have an edge. As investors, we should seek managers who ground their work in thoughtful, transparent assumptions that align with long-term success.
Clarity matters. Belief matters. And for investors, understanding both can make all the difference.