Originally published in the Brandywine Asset Management Monthly Report.
Since the end of the first quarter, Brandywine’s Symphony Program has suffered its worst peak-to-trough decline since the start of trading in July 2011. On a daily basis (as opposed to the month-end data usually reported), performance peaked on March 15, 2013 and troughed on July 31, 2013. During that 98 (trading) day period, the program dropped a total of -8.67%. Let’s look at how this compares to expectations based on our tested historical performance.
In the historical simulations for Brandywine’s Symphony Program covering the period January 1999 through June 2011 (immediately prior to the start of actual trading in the program), there were 11 peak-to-trough drawdowns (looking at daily data, not just month-end) that exceeded 8%. This amounts to one such occurrence roughly every 14 months. Based on this data, our current drawdown was a bit overdue, having arrived in our 25th month of actual trading. But what this points out is that, although every drawdown is unwelcome, they will occur, and this current drawdown is right in line with historical expectations.
The key is in controlling drawdowns; limiting their impact so when the turnaround occurs, new performance highs can be quickly achieved. (As Mr. Dever states in the final chapter of his best-selling book, “Drawdowns are the greatest impediment to high returns and are the true measure of risk”). In that regard Brandywine stacks up quite well against the most popular position in most people’s portfolios, the S&P 500. For example, despite being the largest we have incurred, the current drawdown is less than 1/6 that of the S&P 500 decline in 2007 – 2009 and less than 1/5 that of the S&P 500 decline in 2000 – 2002. Brandywine’s Symphony Program controls risk in the following ways:
- Unlike the S&P 500, which in the short-term is dominated by one primary return driver – investor sentiment – Brandywine’s Symphony Program incorporates dozens of trading strategies, based on numerous unrelated return drivers, to trade across more than 100 global financial and commodity markets. This spreads the risk, greatly reducing the impact any single ‘event’ or change in investor sentiment will have on Brandywine’s portfolio. (You can see the primary return drivers powering stock market prices by following this complimentary link to the first chapter of Mr. Dever’s book: http://bit.ly/xrz2Ur).
- Brandywine’s Symphony Program is designed to naturally decrease exposure when there are fewer profit-making opportunities and increase exposure when there are more opportunities. This occurs because Brandywine’s multiple trading strategies operate independently of each other. When there are fewer opportunities, fewer trading strategies signal positions.
Evidence of this risk reduction during negative periods is provided by Brandywine’s margin-to-equity ratio, which is a rough measure of market exposure. During down months Brandywine has averaged a M-E ratio of 7.77%, which is more than 15% lower than the ratio during Brandywine’s strongest performing months. Interestingly, (although past performance is not indicative of future performance), Brandywine’s M-E ratio increased to its highest level in more than four months on the last day of July. This indicates that Brandywine’s Symphony Program is confident about near-term profit opportunities.
This confidence reinforces the statement we made last month that “now may be an excellent time to invest with Brandywine.” We believe it is especially opportune for those who have significant investments in the U.S. stock market. Year-to-date, the S&P 500 total return index is up +19.62%. This is significantly above its long-term average (since 1970) of 10.36%. In contrast, Brandywine’s Symphony Program is down 3.00% on the year, while its expected annualized return based on past trading and research is approximately 12%. The divergence is striking and presents a great opportunity for you to diversify your portfolio.
We realize history is not a perfect guide, and past performance is not indicative of future performance, but – to repeat what we stated last month – if you are prepared to take an analytical—rather than emotional—approach to investing, please call us to discuss how an investment with Brandywine can improve your portfolio’s overall returns and reduce your risk. The time to diversify is now, not after stocks suffer a decline.
Because we reference historical tested performance in this report, the following disclaimer is required:
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.