Erik van Dijk

Erik van Dijk
Contributor since: 2010
Company: LMG Emerge
Thanks for your excellent comment.
A few caveats apply:
1) Your note seems to be based on a strong belief in rational outcomes.
2) Although we do believe in rationality ON AVERAGE and in the longer term (exactly what you liked to express concerning the examples!) in the short term behavioral finance teaches us that people tend to be sensitive to behavioral biases and irrationalities.
If we follow the movement of stock markets during a period like the current one (Debt issues in the Euro zone with struggling European leaders and the IMF trying to solve it) we see that more or less random and in-and-of-itself not so important events with clear visibility and easy interpretation (e.g. the images of the killing of Khadafi) seem to be at least as important as the actual progress when it comes to solving the debt crisis. And there are dozens of examples like that.
We believe in a bounded rationality model , also based on academic papers about this topic, and think that - especially when taking into account a multi-factor approach where all investment opportunities are disentangled into combinations of factor sensitivities - an investor who combines solid application of probability theory (his long-term, rational strategy) with a very versatile short-term flexibility to incorporate the irrationality of others (e.g. by using technical analysis indicators to capture the behavioral flaws and market moods) will do best.
In our own work we do so by using Momentum and Overreaction indicators (including seasonal patterns). We also have good experience with the use of the VIX indicator as additional 'climate' indicator.
Thanks for your excellent feedback and I hope that our reaction - albeit a bit later than expected because of a busy period here at LMG - is of use to you.
Check out the Seeking Alpha main pages for a new article in which we also analyse this mixed presence of rationality long-term and behavioral biases short-term.
Kind regards,
Erik L van Dijk
LMG Emerge
Good to see that you are also a practitioner. Also played postal chess (at the ICCF) in the past. But business and management roles for the Chess Federation (Netherlands and FIDE) replaced my own activist stand in this respect.
But good to see that we both know quite well what chess is about. And it is clear from your deep answers that you do.
Hope that you can accept that we cannot dig too deep here with respect to proprietary firm knowledge, but basically what we also do is run regressions in which we analyze the alpha of managers against sets of fundamental variables from our asset allocation models and databases so as to see to what extent their excess returns are sensitive to specific aspects of asset pricing.
We also repeat this exercise with a set of country-asset class indices. We added the latter 'loop' to the process when we found out that some regional and global managers basically scored their alpha through structural overweights in one or the other country. Often not at all the result of well-funded investment decisions but more related to coincidental factors.
Example: some MENA managers do not include Turkey in their MENA definition whereas others do. And differential strategic weights are another issue. By linking alpha to asset-class / country indices as well we can pick up the most remarkable and deviant sensitivities.
But you are right: in the end you are of course still lift with uncertainty. But never so big as to believe that when faced the decision to invest in Ashmore, Dimension or Acadian (3 GMs in Global Emerging Market Equities) OR a local Dutch big bank trying to present a nice Global Emerging Market Equities product, the former isn't better. Of course, in individual months our Dutch friends could outperform.
But just like you and me - based on our chess strengths - might be so lucky as to score one or two successes against a top GM in our favorite opening, our problem is that when we play more over a longer period of time, our good luck will fade away.
Being an insider in investing, there is unfortunately one huge factor blurring the picture. One that I am faced with time and again:
Very often clients demand manager selection decisions that are not solely based on performance. Performance is of course an important factor, but there is a lot more.
'Costs' is another one. With the 'cost' being 'certain' and the performance 'uncertain' some clients do tend to have an extreme cost focus. Another one is 'domicile'. Sometimes institutional clients request that you stick to local parties or at best Anglo-Saxon parties that they are used to. Even when a specific local managers from let's say Brazil was better, they might still want to stick with their good friends from Dutch Bank X with whom they play nice games of golf.
Of course, there is a 'price' for all those non-performance related factors and when the difference is too big between performances of managers, they won't help anymore.
And you can also say that when tournament organizers have to set up fantastic chess tournaments those factors will play a role as well, but believe me: on average, the non-performance related factors in investments are of larger importance than those in chess.
I am optimistic about the future. There is a trend, forced upon us by growing problems of pension plans (returns are more difficult to generate in a world of relatively low interest rates), compliance, transparency and unfavorable demographics. That will give better asset managers more chances vis-a-vis their peers and it will also as a result of that trigger the beginning of an increased professionalization of performance measurement in investments.
Chess has their Elo Rating, but Investments have many rating systems none of which is very good when it comes to forward looking performance. That is why we developed our own approach in cooperation with a large UK-based institutional manager selection database and an innovative manager selector from the same country (Camradata and BFinance respectively).
Hi thanks for your feedback.
We have looked into that and I agree partly. Any top level chess specialist can tell you that grandmaster X or Y is less good or better in opening X or Y or middle game position A, B or C.
However, most manager selection specialists don't get much further than looking at past performance and one or a few risk indicators. Digging deeper into portfolio compositions in comparisons with the firm's philosophy etc is always done on paper but never really practiced.
Being - personally - quite a bit involved with top chess and - as a firm - with manager selection, we believe that the RELATIVE level of of analysis in chess is better than in manager selection. So it is to a large extent a problem of the selectors. Maybe just as much as of the asset managers.
But I agree with your points that time frames do play an important role. We basically solve that by looking at rolling windows of three time frames (short-term - up until 12 months rolling window); middle-long term (1-5 years) and long-term (more than 5 years).
When a manager's strategy is relatively new (i.e. not 5 or even 3 year track record) we will look to indirect measures (who are in the team? where did they work? how was the track record there?) or simple decide to wait a bit. It works quite well.
We will co-launch a fund incorporating our methodology later this year.
Thanks again for your very deep remark.
Kind regards,
Erik van Dijk
LMG Emerge
Note: although we wanted to make sure that this article was not written in a technical, 'quant' way, please do not mistake us: although we do often not agree with Roubini's shortism, we do admire his capacity to think out-of-the-box and how this often translates into contrarian thinking.
We are therefore not at all surprised that we can shake hands when it comes to our vision on Frontier Markets.
Hi AAJetMan. This is indeed difficult. Foreign nationals would need to hold an account with a bank in Iran or work via a fund that does so. There have been efforts to establish reasonably accessible funds, but up until now it has not been easy to get that exposure except via Middle Eastern banks. And even then it is not easy.
Actually: it is not just not easy. I would at the moment - when not being Iranian or living in a country which has closer ties (and no embargo) with Iran - simply wait until the West and Iran start a dialogue. This will then reduce political risks and provide further momentum to the TSE (Tehran Stock Exchange).
LMG Emerge will of course keep you posted about new developments via its Facebook Page at
Hi Rob
Thanks for your feedback. We have about 1000 fans on our firm's FB Page, where I published the piece as well.
Would you mind if I add your comments to the there as well?
Kind regards, Erik
And this little message on the web illustrates our where in the world would this translate into advice to sports or other type of foreign travelers not to go to New York anymore! worries !
Kind regards, Erik
Modie...see above....the reply was for both you and Old Trader
Modie, Old Trader
In and of itself it is not a big problem that countries do not produce their own food. See for instance the experience of smaller trading nations like the Netherlands (50 percent of what we do is export and import as part of GDP is of the same dimension). As long as you find yourself an internationally feasible 'comparative strength' there is no need whatsoever to specialize in everything.
Actually : only the really large economies like China, Russia, India, the US and Japan stand a chance and maybe EU as a whole. However, EU does already consist of a group of nations that specialized in other things than agriculture; China has a shortage in commodities, Japan no energy production of substantial size etc.
So I guess that one of the things that makes the US a special blue chip is the fact that the US economy is probably the most generalist one. And that is of course in a way an asset. But it is also a burden when the international competitive rat race becomes tougher due to Globalization.
Thanks for your valuable feedback.
Hi Soonthoni
We agree. Finding a balance between economic growth and its internal political process is a big challenge for the Chinese leaders. So far they have done extremely well.
However, when all are poor 'progress' in monetary terms is a relatively cheap tranquilizer when trying to keep political tensions low.
The more mature the economic progress gets, the more further increases in wealth will have to deal with a) situations of income redistribution; and b) an increased middle class who - in line with Maslow's Pyramid of Needs - might also demand political freedom and rights as 'consumable intangible asset'
Hi Aarc
To be frank: I believe that those expecting to score a big profit by investing in China might already be too late at least in the short run, except for some mean reversion patterns after lousy performance of the Chinese stock exchange recently.
Obviously long-term performance in China will probably be above-average but not by a wide margin anymore.
It is probably for speculative investors more interesting to analyze who is going to benefit from structural Chinese growth and increased demand. We believe that this could be the case for producers of commodities and energy products.
Africa and the Middle East might therefore be the most interesting shorter-term growth stories for those who want to jump on the Chinese bandwagon.
Interesting comparison Japan in the 80s and China now vis-a-vis the US back then and now.
I do not agree that it is speculation what is going on. I do however acknowledge that any country can be victim of disappointing results.
However, back then we were talking about a situation in which the US had a far larger labor pool than Japan. Right now the opposite is true when comparing things with China.
When adding to this that in a Globalized world 'cheap labor' is just as much - if not more - a scarce resource than other production factors, and knowing that the procution factor 'financial capital/money' is more than readily available in China, the US needs to outscore the Chinese by a huge margin on Technology, Innovation, Knowledge.
But taking into account that these assets can be 'bought' by China by acquiring firms or the knowledge directly, we believe that it is more speculative to assume that China will not take over.
But just as much as history has shown that all global leaders have a limited holding period, so does China. Demographic factors might actually make China one of the shortest reigning global leaders. But that does not change our conviction that it is hard for an economy with 4-5 times less people to maintain the lead if that bigger economy (in terms of number of people) has far more financial resources at its disposal as well.
And don't forget: to quite some extent there is a self-fulfilling aspect at work that makes this likelihood even bigger....see all those Western firms fighting each other to be the first or biggest with foreign direct investments in the Chinese market.
The comparison with Japan in the 80s does therefore look logical, but it's not a perfect one.
Interesting point Aarc
But I believe that we should not underestimate the flexibility of the US economy on the one hand and its strength in Human Capital and Knowledge - two forceful production factors - on the other.
And let's not forget: even when a new country becomes the global economic leader, it is nowhere written that the former number 1 collapses. In a growing economy there is room for a strong number 2, 3 etc.
But the ROLE of the former leader will have to change. When the US took over as global leader from the UK it was clear that the latter had difficulties to adjust, and that is a euphemism with a Pound Sterling dropping like an average Emerging Market currency in those days.
We are convinced that there will be a 'landing', i.e. China taking over from the US, but also confident that it will be a 'soft landing' since it will take much much longer before the relative strength in Human Capital and Knowledge / Innovation is lost.
Hi Old Trader
I agree that on the down side, various financial indicators - with debt being an important one - show us that Europe is a bigger risk to financial markets than potential weaknesses in the US economy.
Within Europe the Union is under severe pressure and there is a clear North-South divide, with Germany and those nations that are strongly linked to Germany (e.g. the Netherlands) being probably the exceptions to this warning.
Pressure on the Euro is not unlikely. Although it is way too early to expect its total demise.
Hi Mody
That is not correct. Britain is part of the European Union. They refused to introduce the Euro as their currency, but they are part of EU.
We, is LMG, our firm.
Hi Pusi
And we appreciate your kind feedback! Just make sure to be careful when you invest. Our long-term patterns can be blurred by short-term tactical aberrations. Make sure to capture tactical periods of weakness when taking a long position.
But we believe that the hidden undervaluation of the Chinese Yuan Renminbi is providing any China long strategy with a hidden put option for foreign investors, especially those in EU and the US.
We don't. Number of people is an important factor. But it is not the only relevant production factor. There are others.
And our research was actually undertaken because we wanted to answer the 'When' question, not to surprise the audience with China's strong position.
To be honest: we do also hold the belief that China's nr 1 spot in the world rankings (in terms of world leadership in economic affairs and size) will probably be relatively short-lived compared to previous leaders. More on that in future research.
Hi Modie
Good point. We were a bit reluctant to treat Hong Kong as complete part of China. First, because Hong Kong did - under British rule - already establish itself as a successful city state. More or less following a similar model as Singapore.
When the Chinese took over they made sure to a) ensure their rulership; while b) trying to maintain what HKG was about in the Western World: 'A gateway to China with a Singapore look-and-feel'.
That is why we treated it as separate one the one hand, but always making sure that we look carefully to HKG numbers, trends etc knowing that the Chinese impact is large.
In a similar fashion we are also reluctant to analyze EU as the simple addition of all EU countries. True, that linkage is much looser, but it is still there.
King, I agree.
Economically, long-term developments should be positive when a large part of the world that was previously 'less developed' is now entering the global game with more power. Unless their new power is a complete crowding out of currently developed nations.
Nobody believes that, although there will of course in international competition always be some level of new growth that replaces old growth. Our estimate is that every 1 percent of new growth (i.e. in Emerging and Frontier Markets) translates into a net gain of 0.5-0.7 percent for the world as a whole.