Predicting Performance

Originally published in the Brandywine Asset Management Monthly Report.

If there was ever a heading that would attract the attention of regulators, this could be it. That is because there is no accurate way to truly predict performance. In fact, every document we send out clearly states in bold type at the bottom of every page, that “PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THERE IS THE RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING WITH BRANDYWINE.”

The fact is that there is only the ability to estimate probabilities of performance, and even those estimates have probabilities associated with them. That said, we were reasonably confident in making this statement to a potential investor in Brandywine Symphony Preferred Fund earlier this year, “You WILL incur a 30%+ drawdown at some point if you invest in Brandywine Symphony Preferred Fund.”

That was because every measure of Brandywine’s past performance , both actual and tested, pointed to Brandywine’s Symphony Program incurring a 10% drawdown. And since the Brandywine Symphony Preferred Fund trades at three times the risk level of Brandywine’s Symphony, a 30% drawdown was, and is, expected.

Although we haven’t quite reached that level, at -27.50%, the drawdown of September—October brings us close to that level. It may seem to be a strange word to use, but we were confident we would incur that loss, precisely because of the confidence we place in our research process.

We included a chart in last month’s report that showed the 16 largest drawdowns over the past (almost) 16 years (which includes 12.5 years of tested performance and close to 3.5 years of actual performance). That chart, which is updated and reproduced here, shows that Brandywine’s Symphony Program, measured on a gross return, end-of-day basis, should average a drawdown of between 7.25% and 11.64% once each year.

Image - 201410

This shows the current drawdown as being right in line with expectations, as we should incur a drawdown of this size approximately once every three years (and we just completed our 40th month of actual trading). So this raises the question – is this investible information? Does the fact that Brandywine’s Symphony Program has reached an expected drawdown level indicate that it is time to invest? Perhaps. When we incurred our drawdown last year (which, as illustrated by the other light colored bar on the chart, reached a peak intra-month level based on gross performance of -8.38% at the end of July 2013), we stated that “now may be an excellent time to invest with Brandywine.” Since that time—including (and despite) the current drawdown—an investment in Brandywine’s Symphony has returned +9.67% (and an investment in Brandywine Symphony Preferred Fund has gained more than +36%).

We feel we are in a similar position today. And to paraphrase what we said then, we realize history is not a perfect guide, and past performance is not indicative of future performance, but if you are prepared to take an analytical—rather than emotional—approach to investing, now may be a good time to consider Brandywine.

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