Performance Comparison: Brandywine vs. Stocks and Managed Futures

Originally published in the Brandywine Asset Management Monthly Report.

Brandywine launched our Brandywine Symphony program in July 2011 with funding from an initial institutional investor. Since that time we have more than doubled our assets under management and outperformed both the S&P 500 (despite its exceptional performance over that period) and managed futures traders. Here’s how that was accomplished and why we are confident about our future performance opportunities.

Brandywine compared to stocks
Over the past 2 1/2 years (July 2011 through December 2013) the S&P 500 Total Return Index (which includes reinvested dividends) gained an impressive +47.91%. Over the same period, the Brandywine Symphony Preferred Fund outperformed stocks with a +56.54% cumulative return. What is most interesting about Brandywine’s outperformance is that it was achieved without taking on the high level of event risk that is accepted by people who buy stocks.

Event risk is present when an investment is powered by one or a few Return Drivers. As Mike Dever reveals in his best-seller, stock prices are dominated by just two primary Return Drivers. (Click here to read a complimentary copy of the chapter where this is disclosed). Because Brandywine’s portfolio is diversified across dozens of Return Drivers and more than 100 global financial and commodity markets, global stock markets only account for approximately 20% of Brandywine’s positions. If an event occurs that negatively affects stock prices, it’s impact would likely be much less for Brandywine than for those with greater stock exposure. Furthermore, if you do hold long stock positions, Brandywine provides an additional benefit: our performance is uncorrelated to that of the stock market. That is because Brandywine trades in stock markets representing more than 20 countries but also holds both long and short positions.

The best exhibition of this diversification value occurred in the third quarter of 2011. During that period the S&P 500 fell more than -13% while, in stark contrast, Brandywine’s Symphony Preferred Fund gained more than +30%.

We have heard from a lot of people who feel that the only way they can get the returns they need is to buy stocks. It’s no wonder. The popular financial press presents the investment option as one big gamble: should you buy stocks or hold bonds? But the choice is actually much simpler and intellectually pure. Should you gamble your money on just a few Return Drivers, or increase potential returns and reduce risk by diversifying your money across multiple Return Drivers?

The bottom line is that you’re NOT forced to decide between earning insufficient returns or gambling with stocks. As Mike Dever pointed out in his book, and as Brandywine has demonstrated with the subsequent performance of our Brandywine Symphony Preferred Fund, we have shown that you can:

  1. achieve returns that are better than putting your money into stocks, even during this recent stock bull market
  2. earn positive returns when stocks are losing, and
  3. produce those returns without the high level of event risk embedded in holding long stock positions.

Brandywine compared to managed futures
Much has been written over the past couple of years about the difficulty that managed futures traders have had making money. Blame has been placed on market interference caused by Quantitative Easing, lack of extended trends, industry capacity… the list goes on and on. We don’t buy any of it. Traders lose money (or at least don’t produce profits) simply because their trading strategy is out of sync with the markets they trade. We know that sounds simplistic, but over the past decade, and especially after the success of trend followers during the financial crisis, the vast majority of money into managed futures flowed to trend followers. But EVERY trend following strategy we have tested or traded has had extended periods of dramatic under-performance. The past five years should not have been unexpected.

Brandywine is not anti-trend following. 20% of our portfolio is traded pursuant to strategies designed to profit from market trends. But trend-following is only ONE RETURN DRIVER. There are dozens of other Return Drivers that can be exploited and well over 100 global financial and commodity markets that can be traded in a balanced, diversified portfolio. Since we started publishing these monthly reports in 2011, we have presented a number of the Return Drivers used by Brandywine. These include sentiment-based strategies using ETF money flows to trade stock and bond markets, cost of production based trading strategies to profit in commodity markets, and directional arbitrage strategies trading in the currency and interest rate markets.

Brandywine’s Symphony program has outperformed managed futures traders, with low volatility, precisely because of our use of multiple Return Drivers to obtain true, balanced portfolio diversification. We realize we have an advantage over many other futures traders in that our 30+ years of history has provided us with the time to research and develop hundreds of trading strategies based on a myriad of Return Drivers. It’s a compilation of research that cannot be built over night. But our biggest advantage is in our investment philosophy. Brandywine doesn’t limit ourselves to one style of trading (unless you consider Return Driver-based trading as a style). We simply employ any valid trading strategy (the vast majority of which are fundamentally-based) that can be systematized and incorporated into our diversified portfolio.

The result is that Brandywine’s Symphony program has been profitable every year since we started trading in 2011 and has produced a 12%+ cumulative return with just a 7% annualized standard deviation. Although this return is below our long-term target, it is well within our short-term expectations. In contrast, the BTOP 50 was down –2.0% over the same period and the Newedge CTA index fell –2.6%.

What to expect
There is no certainty in investing. There are only probabilities. Brandywine is confident that the probability of us hitting our targets for risk and return are maximized by our multi-strategy, Return Driver based approach. We began trading Brandywine’s Symphony program in July 2011 with expectations based on our past trading experience and research. We continue to perform within those expectations. While we cannot state with certainty that the future will continue on the same path, we are confident that our approach provides us with higher probabilities of achieving our performance targets than if we were to employ a less-diversified approach.

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