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Michael Dever
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Founder, CEO & Director of Research for Brandywine Asset Management and author of "Jackass Investing: Don't do it. Profit from it." I have been a professional investor/trader since 1979 and have experience in stocks, managed futures, commodities, mutual fund arbitrage, market... More
My company:
Brandywine Asset Management
My blog:
Mike Dever
My book:
Jackass Investing: Don't do it. Profit from it.
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  • The Psychology Of Investing

    Over the last week of September, Brandywine's slight monthly profit reversed to a moderate loss, with Brandywine's Symphony Program closing the month down -1.48% and the aggressively-traded Brandywine Symphony Preferred Fund closing down -5.47%. In contrast to July's large sell-off, over the past two months Brandywine Symphony's performance has fluctuated in its tightest range of the past year, as shifting sentiment and other conditions have resulted in the various strategies within the Program partially offsetting each other's positions. Interestingly (and illustrative of Brandywine's non-correlation to other investments), over that period the S&P 500 posted its largest trading range in more than three years.

    "It was the best of times, it was the worst of times…" is not just the opening line to Charles Dickens' A Tale of Two Cities, it is also an apt description of the emotions facing investors and their investment managers.

    When Brandywine's Symphony Program was hitting new performance highs in August 2014, it was the "best of times." Over its first 38 months of trading, Brandywine's Symphony Program had posted a Sharpe ratio of more than 1.0, in line with our high expectations. This resulted in our aggressively-traded Brandywine Symphony Preferred Fund being awarded the top Macro Fund by HFM Week (in the under $1 billion category).

    But paradoxically, it was also the "worst of times" from the standpoint of what was to come. Over the ensuing 13 months (thorough September 2015) the Program and Fund suffered through their longest and deepest performance drawdowns.

    This stark comparison illustrates why successful investing is such a difficult pursuit. Just as the best of times emotionally do not ensure future profits, it is often the worst of times that are the best time to invest. Take for example, March of 2009. Global stock markets had suffered through one of their most difficult periods since the Great Depression of the 1930s. Stocks had lost half or more of their value in the preceding 18 months. The news programs were filled with reasons why things would get worse before they got better. Very few people were comfortable putting money into stocks at those lows. Yet as we all know that was precisely the best of times to put money into stocks.

    While individuals and even many institutional investors often succumb to these emotional swings, the most successful investment professionals have processes in place to counter, and even exploit, the negative effect of potentially damaging emotions. This is exemplified in Warren Buffett's oft-quoted comment to "be fearful when others are greedy and greedy when others are fearful."

    Brandywine's Approach to Controlling and Exploiting Emotions

    Brandywine was founded in 1982. Over the past 33 years we have become quite familiar with the emotional swings that come with trading. Brandywine's Symphony Program is built on that experience and the result is that our approach is designed to both manage and exploit emotions.

    Our primary approach to managing emotions is to trade pursuant to a systematic trading model. Although discretion is used during the research and development of our trading model, its daily application is 100% systematic. The result is that there is no urgent impulse for Brandywine to "do something" when we're suffering losses. We will certainly use the experience to guide us in our future research, as we want to learn from our difficulties in order to continually improve our potential future performance. But we won't make changes on the fly, as the effectiveness of our trading model is based on its consistent application over time.

    We exploit emotions by employing, as a portion of our portfolio, trading strategies designed to capture the emotional swings of market participants. This includes both periods when emotions are building and contributing to market trends, in which case some of our strategies attempt to profit from those trends; and times when market sentiment in specific markets hits what is historically an unsustainable extreme, at which time we enter into (generally shorter-term) counter-trend positions.

    Of course, as we've seen over the past year, there will be periods where despite the positive expected returns from our strategies a majority of them will 'get it wrong' at the same time. That's essentially the cause of any drawdown. However, the past two months have started to exhibit a different behavior. There has been much better balance between strategies that have performed well and those that have not. Our tight performance range is one result of this. Our currently moderate margin-to-equity ratio is another. But regardless of the short-term performance, we are confident that the best way to recover from a drawdown and to profit over the longer-term is to continue with the consistent application of our trading model.

    Oct 06 10:17 AM | Link | Comment!
  • The Benefits Of Brandywine's Non-Correlation

    August was another differentiating month for Brandywine. Our positive performance was in sharp contrast to the substantial volatility and negative returns suffered by investors in the world's stock markets.

    The benefit of this non-correlation is starkly evident in the following statistics:

    As can be seen, adding 20% Brandywine to an investment in the S&P 500 both increases returns and decreases risk. This is despite the fact that the S&P 500 total return index is just one month past its highest-ever monthly close and Brandywine is in our largest drawdown to date. In other words, because of our non-correlation with stocks, Brandywine adds value to stock portfolios not only when we're outperforming stocks, but even when we underperform. If Brandywine can add this much value when we're down, think of the value we add when we're performing strongly.

    In addition, Brandywine provides the same diversification value to a portfolio of CTAs, as the major CTA indexes all dropped during August while Brandywine gained.

    And the longer-term benefits of including Brandywine are just as positive:

    Allocating 20% of a CTA portfolio (also referred to as managed futures) to Brandywine also both increases returns and decreases risk. And for long-term investors our current drawdown may present an excellent entry opportunity for a new investment.

    As a bonus, Brandywine can be added to your portfolio without requiring any reallocation of existing assets. We can be purely additive. Call or email us to find out how.

    Sep 03 1:32 PM | Link | Comment!
  • Performance Analysis

    In the first 38 months of trading in Brandywine's Symphony Program, investors earned a cumulative 27% (and investors in our aggressively-traded Brandywine Symphony Preferred Fund gained an explosive 127%). The Sharpe ratio on both programs exceeded 1.0. What made this performance stand out even more was the fact that most other futures traders posted losses throughout this period. In contrast, the past 11 months have been the most difficult on record for Brandywine Symphony, which has posted a drawdown of 16%, while other futures managers have thrived.

    In this report we'll take a look at the two periods with the intent of understanding the differences between the strong performance of the first 38 months and the more recent drawdown.

    The 38 Month Rally

    An evaluation of Brandywine's performance during the positive first 38 months of trading reveals that profit contributions came from a wide range of investment strategies and markets. Moreover, these contributors varied over time. No single market, sector or investment strategy dominated over the entire period. However, the profits were not the result of one continuous move higher in performance. As you might expect, there was an ebb and flow of performance over that period. These can be shown as three distinct positive periods interspersed by two drawdown periods (prior to our most recent drawdown). The positive periods were simply the result of a majority of our investment strategies being in sync with the markets and producing profits, while the opposite was true of the drawdown periods.

    The 11 Month Drawdown

    The current drawdown, which began 11 months ago, can best be summarized by first categorizing our trading strategies into four groups:

    · Value strategies, which include strategies based on production costs and relative value

    · Alpha Hedge strategies, which capture trends

    · Fundamental strategies

    · Sentiment strategies

    The Value group encompasses a number of different strategies, each based on a distinct Return Driver. But they share the common belief that markets will revert to their true value over the longer-term. We realize that good value can turn into great value if markets trend lower. Indeed, a key characteristic of these strategies is that they often accumulate losses before their value is realized (but often, the greater the shorter-term downside, the greater the ultimate upside). Because of our understanding that these strategies can be overwhelmed and generate losses in the shorter-term, we include a separate group of strategies in the portfolio that are designed to thrive in such conditions. These are Brandywine's "Alpha Hedge" strategies.

    Alpha Hedge strategies profit from extended moves in markets (this is how they generate their "alpha"). Their performances tend to be roughly correlated with trend following or momentum strategies. One environment in which they are designed to prosper is exactly the sort of emotionally-trending markets that can be dangerous to the Value strategies. As such, they provide a great complement to Brandywine's Value strategies (which is why we label them Alpha "Hedge"). This was seen during the drawdown. As Brandywine's value strategies produced losses, Brandywine's Alpha Hedge strategies worked as planned and captured profits from the very trends that caused those losses. Through June, profits from Alpha Hedge more than offset the losses from Value. Unfortunately, both groups of strategies lost during July.

    Throughout the strong performance over the first 38 months, the Fundamental and Sentiment strategies tended to be Brandywine's most consistent performers. Their performances not only complemented each other, but often the strategies categorized within these groups would profit when Value or Alpha Hedge were losing. This is the basis of Brandywine's portfolio allocation model, which endeavors to maintain balance among the strategies and markets in the portfolio with the intent of smoothing out overall performance. This favorable characteristic was turned on its head over the last 11 months, as Brandywine's Fundamental and Sentiment strategies contributed to the drawdown. Had the strategies simply performed as they had over the first 38 months (which was in line with expectations), there would have been no drawdown.

    July's Performance

    Whereas the first 10 months of the current drawdown can be attributed to a slight profit in the Value-Alpha Hedge combination being offset by stark underperformance in Brandywine's Fundamental and Sentiment strategies, July's loss was fully caused by the selloff in commodities (crude was down more than 20% and all major commodity indexes fell in the double digits), which hurt the performance of the Value strategies. Unfortunately, Alpha Hedge did not serve as a hedge during the month, but actually added to the losses. The Fundamental and Sentiment strategies were essentially flat on the month. Although the final loss was in the range of what we would consider "extreme," it was achieved by a gradual erosion of performance throughout the month, rather than by one or a few sizable down days. In fact, Brandywine's value-at-risk (NYSE:VAR) declined to its lowest levels in more than a year and our margin-to-equity ratio (another measure of market exposure), fell into the lowest decile of the past year. In other words, the portfolio allocation model did what it could do to contain losses, but pervasive losses across all strategy groups led to cumulative losses, without respite.

    While we obviously cannot predict the future, past drawdowns have each been followed by strong recoveries-with the largest drawdowns being followed by the largest recoveries. And while we are disappointed in the performance of our strategies over the past year, we are confident they remain valid and are based on sound, logical Return Drivers. It is our belief that the first 38 months of Brandywine Symphony's performance is more representative of what to expect going forward than is the past 11.

    Aug 07 1:59 PM | Link | Comment!
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