Q3 2026 – The Secret Is in the Ingredients

Over Thanksgiving weekend, I enjoyed one of the best desserts I have ever had the pleasure of eating. My sister-in-law makes Rice Krispy Treats, but they’re not your average treat. As I ate my second and third piece, and with my mouth still full, I mumbled to her, “What’s in these things?” Her reply was classic. “Oh, you know, all the usual things, just more of the good stuff”. The “good stuff” was the addition of Golden Grahams cereal, chocolate nibs and the base was not just butter, but browned butter. She took something old and often considered average and made it better by adding more of the good stuff.

In many ways, that is exactly how we think about building portfolios. We start with the global stock market, but then purposely add greater emphasis to the characteristics (ingredients) that have historically rewarded long-term investors. Portfolios that taste better!

What goes into a robust portfolio? Our recipe starts with the global equity market, then adds a little more of the good stuff: smaller and medium-sized companies, attractive prices, and higher profitability. The secret is in the ingredients!

Your portfolio is purposely engineered around observable characteristics of companies that financial science associates with differences in expected returns. The reality is that we cannot predict where markets will go next. What we can do is intentionally build portfolios around principles that have stood the test of time.

The first is simple: stocks have a higher expected return than bonds and cash. That additional return is the compensation investors receive for accepting the uncertainty that comes with direct ownership in publicly traded businesses. We call this the equity premium, and this is why all our long-term portfolios hold these assets.

But once we decide to own stocks, another question becomes important: Which stocks should we own?

Our approach starts with broad global equity search and then places additional emphasis on three characteristics that decades of financial research have associated with higher expected returns: size, price and profitability. Our research on size, value and profitability describes an integrated approach that considers these characteristics together rather than trying to predict which one will perform best next.

Size: Smaller companies have historically provided higher expected returns than larger companies. It doesn’t happen every year. In fact, over the 20 years ending December 2025, smaller companies outperformed larger companies in developed markets outside the U.S. and in emerging markets, while U.S. small caps lagged. That is a great reminder of why we diversify globally rather than betting on one market or one factor.

Price: The price we pay matters. We place greater emphasis on companies trading at lower prices relative to their fundamentals, often referred to as value companies, rather than continually putting more money into companies simply because they have become the market’s most expensive.

Profitability: All else being equal, we also favor companies with stronger profitability. Over the 10 years ending in 2025, higher-profitability stocks outperformed lower-profitability stocks globally.

None of these factors wins all the time. That’s the important part. If they worked every year, there would be little risk and probably little additional return. So, we don’t try to guess which factor, country or company will win next. Instead, we own thousands of companies around the world and deliberately tilt the portfolio toward smaller and medium-sized companies, companies trading at more attractive prices and companies with higher current and expected profitability. And the potential impact over a lifetime can be meaningful.

The objective isn’t to outperform every quarter or every year. It is to deliberately build your portfolio around characteristics that have historically improved expected returns, diversify broadly and then give those principles the time they need to work.

Are we at a market high? Are we halfway to the next high? Are we closer to a downturn? Is AI the future?  No one can predict these things. What we can control is how your portfolio is built, its allocation, and whether we stay focused on the factors that have historically driven long-term returns.

The best portfolios, like the best desserts, always start with the best ingredients.

Kind regards,
Christian