Buying “Best of Breed”

Originally published in the Brandywine Asset Management Monthly Report.

Since the launch of Brandywine’s Symphony program in July 2011, the managed futures industry has undergone one of its more difficult performance patches. Over that period the Barclay 50 CTA index has dropped 3.1% and the systematic traders index has suffered a comparable decline. In contrast, Brandywine’s fundamentally-based, yet fully-systematic Symphony program has gained +6.83% and our aggressively-traded Brandywine Symphony Preferred Fund has gained +31.50%.

Brandywine’s positive divergent performance is the result of the diversified, fundamentally-based trading strategies incorporated in our fully-systematic trading model. Developed over the past 30 years, these strategies produce performance that is uncorrelated with traditional CTAs and the major financial indexes. We believe this recent performance, combined with our longevity and past performance, establishes Brandywine as best-of-breed among systematic CTAs and positions Brandywine among the top CTAs for consideration by both institutional and individual investors.

In addition, while Brandywine’s diverse trading strategies result in performance that is uncorrelated to the BTOP 50 during losing periods for the BTOP 50, our model is also able to exploit profit opportunities when market trends reassert themselves. The following two statistics clearly illustrate Brandywine’s favorable performance profile:

Brandywine Symphony’s correlation to BTOP 50 during Peak-to-Trough drawdowns in BTOP 50: -0.11
Brandywine Symphony’s correlation to BTOP 50 during recovery periods in BTOP 50: +0.46

So what the preceding statistics show is that Brandywine’s trading model is able to preserve profits during difficult market environments, such as the one we’ve been in since the start of trading in Brandywine’s Symphony program in July 2011, but also capitalize on market trends when they re-emerge.

Best-of-breed among investment managers is often defined by assets under management. The larger managers are considered better than the smaller managers. After all, they got large because they became accepted by more and larger investors. But larger does not mean better. In fact, as our CEO points out in his best-seller, “Jackass Investing: Don’t do it. Profit from it.,” there are a lot of investment opportunities available to smaller traders that are off-limits, precisely because of their size, to the largest managers. Furthermore, size does not ensure business continuity. In our 30 years of existence, Brandywine has seen the largest managers, through underperformance, become small again, or cease operations altogether.

That said, today the most significant allocations are being made to the largest CTAs. This is not unexpected. The largest investors want to invest in a fashion that is similar to their peers. They are comfortable putting money with the largest CTAs as their decision has been validated, with billions of dollars, by other investors. If their investment loses money, they are at less risk of losing their jobs than if they had invested with a less well-known and smaller manager.

But this is self-defeating behavior. The largest CTAs are fighting a headwind associated with their large size. There are a substantial number of return drivers they cannot exploit because of their size. Brandywine is aware of these limitations. In the 1990s, prior to a shift by our founder towards venture development investing, we were one of the largest CTAs. Our ongoing research at that time was not just focused on finding the best available trading strategies, but the best available trading strategies that could also be traded in substantial size. Since we became a “re-emerging” manager with the launch of our Brandywine Symphony program in July 2011, unencumbered by size, we have been able to re-focus our research effort on expanding our trading across a wide variety of return drivers. The benefit of this diversity shows in our performance.

Brandywine firmly believes that best-of-breed should be defined by the organization and performance. There was a time in the past when Brandywine was considered best-of-breed based partly on our level of assets under management. But even then we stressed that what differentiated us was more than our size; it was our organizational structure, history, investment philosophy and research approach. Those traits continue with Brandywine today and their virtuous effects are manifested in our performance.

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