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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
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Mike Dever
My book:
Jackass Investing: Don't do it. Profit from it.
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  • Controlling Your Destiny

    In a recent television interview, the head of the asset management arm of one of the world's largest private banks remarked that her number one concern was what the Fed would be doing. She is not alone; numerous other investment managers have expressed the significance of Fed decisions on the performance of their portfolios. Many believe the bond and stock markets are artificially priced (read "higher") today as a result of the Fed's actions or anticipated actions. Even Mohamed El-Erian, who rode the bond bull market to fortune and fame while at PIMCO, has stated that the majority of his money is now in cash, as he thinks most asset prices have been pushed by central banks to very elevated levels. He admits this means his portfolio value runs the risk of being diminished due to inflation, but prefers the inflation risk over the risk of having a Fed decision damage his portfolio.

    Concern over Fed action (or inaction) is not the problem. It is merely the symptom of a much larger and pervasive problem. Because their portfolios are dominated by long stock and bond positions, these people have subrogated their investment responsibilities to a handful of people at the Fed (if not just one person!). Literally trillions of dollars of other people's money is essentially out of their control. Not only is this ridiculous, but it is also unnecessary.

    Long positions in stocks and bonds are only two potential ways to make money. In fact, to rely on portfolios dominated by long stock and bond positions is not investing at all. It is gambling (defined in this instance as a person taking unnecessary risks with their/your money), especially when the performance of those long stock and bond "poor-folios" is under the influence of a single decision maker, the Fed. But even without that dependency, it is a gamble to rely on the continued advance of stocks and bonds to produce positive returns. And it is unnecessary because there are so many additional opportunities available for people to truly diversify their portfolios.

    "True" Portfolio Diversification

    Portfolio diversification is the one "Free Lunch" of investing. It enables a portfolio to target both higher returns and less risk than a less-diversified portfolio. But while portfolio diversification is often preached, it is seldom practiced. That is because of the misguided focus on spreading money across long positions in "assets" or "asset classes." By their very definition, asset classes are comprised of a group of securities that exhibit similar characteristics and perform similarly. So, very little diversification value can be obtained by spreading money across assets within each asset class. And if a "poor-folio" is constrained to only holding long positions in asset classes, and if those asset classes are subject to the same event risk (such as a Fed decision), then spreading money across asset classes provides little diversification value. Fortunately, there is an alternative.

    Return Driver Based Investing

    A Return Driver is the primary underlying condition the drives the price of a market. Today, both stock and bond markets are dominated by Fed action. That is the single dominant Return Driver. But rather than subject your portfolio to a single Return Driver, which results in singular event risk, you can diversify across numerous other Return Drivers. Not only will this diversify risk, but it will also create a portfolio that behaves independent of stocks and bonds. This is the approach taken by Brandywine. In addition to dramatically reducing the risk that an adverse Fed decision (or any single event) would have on the portfolio, this approach also results in performance that is completely uncorrelated to the performance of all other investment indexes, including stocks and bonds.

    The results speak for themselves. Since the inception of Brandywine's Symphony Program in 2011, the correlation of monthly returns between Brandywine and the S&P 500 has been just 0.19 and between Brandywine and bonds (measured by the Barclay Aggregate Bond Index) just 0.27. As a result, adding Brandywine to a "conventional" 60-40 portfolio both increases returns and reduces risk, as shown in the following table:

    (click to enlarge)

    Bottom line: if you have a portfolio that is long stocks and/or bonds, or other Fed-dominated assets, and are concerned with how a drop in asset values will negatively affect your portfolio, adding an investment in Brandywine will create important diversification value.

    Apr 08 10:41 AM | Link | Comment!
  • What Makes Brandywine Unique

    Enhance Returns and Reduce Risk

    0.06 . . .

    That is the (non) correlation of monthly returns of the BTOP 50 managed futures index to Brandywine's Symphony Program.

    0.19 . . .

    That is the (non) correlation of monthly returns of the S&P 500 total return index to Brandywine's Symphony Program.

    Comparisons to other investment indexes, such as bonds, hedge funds or REITS show a similar characteristic. Put simply, Brandywine's Symphony Program produces performance that is uncorrelated to virtually all other investments. This low correlation means that adding Brandywine to a portfolio of CTAs, stocks, bonds, hedge funds or most any other investment will both enhance returns and reduce risk.

    What Makes Brandywine Unique

    From the start, we have stressed how Brandywine's return driver based investment methodology would produce uncorrelated returns. Investors understood that when they compared our diversified, multi-strategy approach to the "traditional" investments such as stocks and bonds, whose returns are dominated by just one or two return drivers. But because Brandywine is registered as a CTA, and trades pursuant to a systematic, diversified approach, many assumed we would be correlated to trend following CTAs.

    It has become unmistakable that Brandywine's Symphony Program is also unique among CTAs. A clear distinction is that we produce uncorrelated returns while trading systematically across a globally-diversified portfolio. Other uncorrelated CTAs achieve their non-correlation either by using discretion in their approach, focusing on specific markets, sectors or strategies (such as only employing short-term trading), or selling option premium. In contrast, Brandywine's diversification value to a portfolio comes from our use of dozens of distinct return drivers, not a specialized focus or use of day-to-day discretion. Although we are required to state that past performance is not indicative of future performance, we believe that this diversity of strategies and markets produces more consistent, sustainable and predictable returns than the other methods used to produce uncorrelated results.

    What's perhaps even more interesting is that Brandywine's various trading strategies are even uncorrelated with each other. The average correlation of monthly returns of each of Brandywine's strategies to the others in our portfolio is 0.00.

    What this means is that by including Brandywine's Symphony Program in a portfolio of CTAs, we can both increase overall returns and reduce risk. For example, during the period when the BTOP 50 index suffered a sustained 5% drawdown from the start of Brandywine's trading in 2011 through September 2013, Brandywine's Symphony Program gained more than 8%.

    Brandywine provides the same diversification value to equity investors. Although the S&P 500 has been on a tear since Brandywine's Symphony Program began trading in 2011, the S&P 500 did suffer one significant losing period during the third quarter of 2011. During that period, while the S&P 500 fell more than 18%, Brandywine gained more than 6%.

    We look forward to showing you how including Brandywine in your portfolio can enhance returns and reduce potential risk. The time to add Brandywine is now, while other investments are hitting new highs in performance.

    Mar 09 3:39 PM | Link | Comment!
  • Winning With Defense

    A record 120 million people watched the New England Patriots defeat the Seattle Seahawks in Sunday night's closely fought Super Bowl. While there were many highlights, it is the "2nd and goal" from the one yard line with 20 seconds left in the game that will forever be etched into the minds of Seahawks fans. Instead of handing the ball to star running back Marshawn Lynch, Seahawks coach Pete Carroll called for a quick slant pass to Ricardo Lockette. It is often said that defense wins games, especially the big games like the Super Bowl, and Sunday night proved no exception. Instead of a game-winning touchdown (or at worst an incomplete pass that leads to a touchdown run by Lynch on third or fourth down), undrafted rookie safety Malcolm Butler intercepted the pass and ended Seattle's chance for a repeat Super Bowl win. One 'fatal' mistake resulted in the New England Patriots taking home the Super Bowl XLIX trophy.

    We repeat this play-by-play - at the risk of boring those 120 million people who watched the real game - because we'd like to stress the point that defense is perhaps even more important to successful investing than it is to winning football.

    Avoiding Disaster

    Brandywine's Symphony Program is currently in its largest drawdown to date, with a -13.94% peak-to-trough drop in value, and our aggressively-traded Brandywine Symphony Preferred is down more than 38%. While we would love to avoid all drawdowns, the key is to avoid disaster - the investing equivalent of a goal line interception. As we've discussed in many of these reports over the past few years, Brandywine attempts to constrain our drawdowns and improve our odds for a rapid recovery by creating a balanced portfolio that employs broad portfolio diversification across both trading strategies and markets. So, although our current drawdown is our largest, it is still within a manageable range.

    But while this balanced, diversified approach improves our probabilities of avoiding disasters, it can never eliminate drawdowns. The current drawdown, which began in September, is a great case in point. Over the past five months, global markets became much more correlated with each other, as the sharp rally in the dollar and the over-supply in the oil markets triggered a succession of related market moves in bonds and commodities. The majority of Brandywine's fundamental, sentiment and arbitrage-based trading strategies were on the wrong side of many of these moves - which is essentially the definition of what causes a drawdown. Despite this, our monthly losses have been better contained each month, as both the trading strategies and portfolio allocation model adapted to the changing market conditions. And because we have avoided disaster-sized losses, we are still "in the game" and able to apply the same game plan going forward as what made us successful in the three years leading up to our current drawdown.

    From the start of trading in Brandywine's Symphony Program in 2011, we have stressed how our systematic Return Driver based approach to trading, which includes a heavy dose of fundamental inputs, will produce returns that are uncorrelated to not only all conventional investments (such as stocks and bonds) but also to other futures traders. This is reflected in our non- correlation to the S&P 500 of 0.15 and even lower correlation to the BTOP 50 managed futures index of 0.09. A specific trade example of this non-correlation took place on January 15th, when the Swiss National Bank abandoned its support for their currency's peg to the Euro. The majority of trend followers were caught short and suffered losses on this move. In stark contrast, Brandywine's trading strategies recognized that despite sustained central bank intervention the Swiss Franc continued to rise against the Euro. As a result, Brandywine was net long the Swiss Franc and profited from its sharp advance on that day.

    "Stay the Course" or Modify the Game Plan?

    There is almost never second-guessing when a team is blowing away the competition or when an investment manager is minting money. The second-guessing only takes place when losses are incurred. While we at Brandywine have certainly scrutinized our performance closely over the course of our current drawdown, with an interest in identifying where and why the losses accrued, we are fortunate that our investment philosophy provides us the path to improvement, without the need to second guess. That is because our model was designed from the start to enable - actually require - us to develop and incorporate any additional trading strategies with the intent of further diversifying the sources of our returns. Also, as we continue to collect more real time trading and performance data, our portfolio allocation model will benefit by being able to use that information to improve the portfolio balance across both trading strategies and markets. While buying drawdowns is often difficult to do emotionally, we continue to believe that the current drawdown presents a great opportunity to initiate or add to an investment with Brandywine.

    Feb 06 11:37 AM | Link | Comment!
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