The Year in Review

Originally published in the Brandywine Asset Management Monthly Report.

2012 was the second consecutive losing year for the BTOP 50 managed futures index. This is the first back-to-back annual loss for the index since its inception 26 years ago. Systematic and diversified CTAs performed even worse than the broader index.

In contrast, Brandywine posted its second consecutive profitable year since the launch of Brandywine’s Symphony program in July 2011. So why has Brandywine – a systematic, diversified CTA – performed so well when our peers have not? The answer is rooted in our extensive history and unique investment philosophy.

Brandywine’s Innovations

Brandywine’s difference is not just one of performance, but one of design. Brandywine’s Symphony program was based on, and is the culmination of, the 30+ years of research and trading conducted by Brandywine since our founding in 1982. During that time Brandywine originated several approaches to managed futures trading and risk management.

In 1991 – at a time when traders were either “fundamental discretionary” or “systematic trend following” – we introduced fundamentally-based systematic trading in our Brandywine Benchmark program. At the same time, we innovated what today has become known as “risk-parity” portfolio modeling. This innovation, which bases portfolio allocation on balancing risk across a portfolio, was documented in a paper that was distributed by Brandywine to investors in the early 1990s. While the rest of the investment world has recently caught on to risk parity, they are still bound by the archaic concept of asset classes.

Brandywine recognized the limitations imposed by the use of asset classes, and so along with its development of risk parity modeling, Brandywine also introduced the concept of “return drivers.” This innovation (the use of return drivers) is discussed throughout Mike Dever’s book, Jackass Investing: Don’t do it. Profit from it., which was published in 2011 and remains an Amazon best-seller.

Brandywine’s Performance

The combination of multiple return driver based trading strategies that incorporate fundamentals in addition to technical factors, risk parity portfolio modeling, and diversification across more than 100 global markets (including financials and commodities), enabled Brandywine to consistently outperform its peers during the 1990s. Brandywine’s Symphony program is continuing this legacy of performance. This is evidenced not only by our positive performance, but by the fact that our current actual performance closely matches our expectations based on our actual past performance and updated testing. If you would like to discuss Brandywine’s investment philosophy, research innovations and performance in more detail, please contact Mike Dever or Rob Proctor, and we will schedule a call to discuss and answer your questions.

Best wishes for a successful New Year.

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