“We learn all the time. I’ve continued to learn over the last few decades. You learn it’s never time to do a touchdown dance.” – Mike Dever (Tweet)
On our next year-in-review, Mike Dever talks about how 2014 evolved for his firm and what they learned from the year. He discusses the changes they made to their program as well as the recent Swiss Franc move and what they learned from that. He also talks about why investors need to keep the long term view in mind when investing, and not re-evaluate the program every time the profits take a dip.
Thanks for listening and please welcome our guest Mike Dever.
In This Episode, You’ll Learn:
- What Mike’s firm does that blends together different strategies in order to diversify a portfolio.
- How 2014 was for his firm.
- Why they had a great first quarter to 2014 when most CTAs did not.
- How the Interest Rate sector and Agriculture sector did well for the program.
- Why he saw the Swiss Franc move coming.
“The Swiss Franc move, as much as it was unanticipated, still gave some indicators that something was going on.” – Mike Dever (Tweet)
- How they are in a continual process of learning and subsequently improving their program.
- Convergent vs. Divergent environments and what Mike is looking forward to.
- How to mitigate a big inflow of investment followed by immediate outflow.
- The book that Mike wrote and if the Myths still hold true today.
- Why people think about the long term view when they invest, and think about the day-to-day view when they take their money out.
Resources & Links Mentioned in this Episode:
This episode was sponsored by Swiss Financial Services:
Connect with Brandywine:
Visit the Website: www.brandywine.com
Call Brandywine: +1 630 361 1000
E-Mail Mike Directly: Mike@brandywine.com
Mike: I think the key for just successful investing... This year, after a number of years where trend followers did poorly, we had a nice run and that attracted assets. We doubled our assets last year. It kind of keeps pointing out that people always tend to do the wrong things. They start out with a long term view. As soon as there're losses or they're comparing to something that's doing better than what they have in their portfolio, they start shifting to a short term view. That's just so damaging to their performance. If people could just put their money into a diversified portfolio and just not re-evaluate it on a daily, monthly, or even annual basis. They need to realize that it's there for the longer term, everybody would end up with a much better performance than they do in the aggregate that they end up with.
This is Mike Dever, Founder and CEO of Brandywine Asset Management, and you are listening to my year in review on Top Traders Unplugged.
Introduction: Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences their successes and their failures, imagine no more. Welcome to Top Traders Unplugged. The place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence, or investment career to the next level. Here's your host, veteran hedge fund manager, Niels Kaastrup-Larsen.
Niels: Welcome back Mike to this review of 2014 where we look at the big events from the point of view of your trading strategy. I'd like to explore the ups and the downs as well as the big take away from what can only be described as an interesting year for systematic trading strategies, in general. As we know just because you're systematic in your trading, it doesn’t mean, necessarily, that your strategies deal with the market events in a similar way. But before we jump into the year as a whole, because you were one of the very early ones… guests on my show, why don't you take a couple of minutes and just remind people what it is your Symphony program really is all about.
Mike: Sure, and thanks, Niels. Symphony is set up… We are systematic managers, but we're not the traditional I guess conventional systematic manager that tends to be technical only or technical trend following. We incorporate a variety of strategies that include fundamental factors, as well as sentiment factors, arbitrage factors, inner market relationships, you know quite a variety of things that went together into a diversified portfolio. So we are systematic, but we use a lot of discretion certainly in developing the strategies. The strategies are based on my thirty-five years of trading. A large chunk of that were I did discretionary trading, and a lot of the ideas that we dealt with and incorporated into a systematic model, now are based on a lot of those discretionary experiences and fundamentals that I used to look at.
Niels: Sure. And given that… and obviously as you rightly say, it is different from many other managers in the "CTA industry." Tell me about 2014 from your perspective, where we certainly (for most managers) saw a very difficult start to the year with a very strong finish. Tell me how the year evolved from your point of view, both from a strategy point of view, and maybe even from a firm point of view.
Mike: Brandywine had a great start of the year in 2014. The first quarter we were up… You know solidly I know a lot of the CTA industry had difficulty. During that period, we had a good first half. We went through the second half, but what we were making, it's almost the exact opposite profile for what you'd see the CTA indices did for 2014. It's not that we're negatively correlated we're uncorrelated to pretty much everything, CTA's, as well as equities, or bond markets, or traditional investments. It's just that in 2014 we turned out to be somewhat negative in the way we went quarter to quarter relative to the other CTA's.
Niels: Now I haven't had the chance really to ask anyone this question, so I look forward to asking you. What was so great about the first quarter?
Mike: Yeah! Good question. Well, we're looking at a lot of different factors. We trade across well over one hundred markets in the portfolio, so there's a lot of things that came together in that first quarter that worked out for us. Some of the agricultural markets, we did really well with… in our fundamentally based strategies. I think I heard one of your other talks about coffee having a good rally, right? So there were some good commodity markets that contributed during that period. I'd say the first part of the year was driven by our fundamentally based strategies. It was across different sectors, but agriculture was one of the standouts for us during that first part of the year.
Niels: Right, and if you look at the year as a whole and both if we look at market contributions… You know, which markets you did well in overall, which markets were more tricky, and maybe imposed some losses on the portfolio, but also in terms of the return drivers. If you can kind of… Maybe you can find some of them that you can sort of talk about and say, "Well this actually was a very favorable or unfavorable environment for this particular, or these particular return drivers."
Mike: Yeah, so as much as the fundamental strategies that we trade worked great in the first part of the year, they came back to bite us a bit in the second half. So some of the markets that the trend strategies did well in, like the energy markets, for example, gave us difficulty in some of our fundamental and sentiment based strategies in the second part of the year. You know, so we'd reach extremes in sentiment that would indicate countertrend moves, usually short term. The move was just so dominant in the energy complex to the downside, and unrelenting that those strategies didn't have an opportunity to take out short term trades counter to those trades at all. Now on a favorable side though what that meant was our momentum strategies in the portfolio, and we refer to those as alpha hedge, (because they generate alpha but they're intended to hedge the other strategies in the portfolio that may on occasion get on the opposite side of dominant trends), they did great. I mean that was one of the stronger performing strategies we had in the last few years, and you could see that with the CTA industry that tends to be trend following, doing very well. That portion of our portfolio did extremely well as well.
Niels: Sure. And given the fact that your year, you came out with a flat year last year… Were there any big moves… Let me rephrase that, were there any markets that had big contributions positively or negatively, or was it all more or less a mixed bag, nothing really net-net ending up doing much to the portfolio?
Mike: Well, we trade well over one hundred markets in the portfolio, so there's always going to be markets at each extreme for us. And extreme means maybe it contributes a couple percent, positive or negative on a standalone of the portfolio, that does happen. And for us the sectors (and we don't generally break down when we're talking about it to individual markets) but sector wise, the agricultural sector and the interest rate sectors did extremely well for us during the year. They were very positive. And where we lost money was in the metals and the energies primarily. So the markets that had the strongest trend, which was energy, in the last part of the year we gave up profits in there. The metals that were kind of mixed through the year, we just had difficulty with a number of the strategies in the portfolio to have those be in that loss for the portfolio during the year.
Niels: I think a lot of people actually had problems with the metals in general so not surprising. Now, of course, the year was also in your case a year of two tales but in your case probably swapped the other way around. But it's also a year that's going to be remembered for a number of themes... Oil you mentioned already, we had the Russian and Ukraine situation, and of course stretching the year into the first couple of weeks of 2015. We've had just another theme being given to us which is the Swiss franc. A lot of these themes drag headlines. I mean the news are going to talk about, and press, negative stories about these things and how people lost money on that event or not. Rarely do they talk about anything positive. So in order to change that impression in the investor's mind, at least the investors who listen to our conversation, how did you deal with some of these situations? And maybe we just talk about the most recent one that only happened a few days ago, the Swiss franc. How does a strategy like Symphony, how does it handle a completely unexpected situation, market event: a market move that, in theory, should never be able to happen? How did you fair through a day like Thursday?
Mike: Right, so last Thursday was one of our better days in our track record. The Swiss move as much as it was unprecedented and unanticipated, it still gave some… sort of indicators that something was going on. So we're looking at things that are not just technical but fundamental at Brandywine in the Symphony program. So for example just as a discretionary trader, somebody that would be sitting in front of the screen and trading and looking at a lot of fundamentals which we don't do of course, we're systematic, we incorporate a lot of those same concepts that I used to use as a discretionary trader. You would see the Swiss reserves growing dramatically, like what happened in December: over thirty billion dollars worth in Euro purchases. At the same time, you see that the Swiss is rising against the Euro. You start to understand just in a combination of events and statistics that are coming in that… The potential either is some strain in the system, and as much as people are trying to push something down it's… All the underlying pressure is pushing it up. So we ended up with a long position, the Swiss. It actually… We'd increased that position by thirty percent the week before the move based on again, a variety of strategies in the portfolio, netting out into that position. So that turned out to be a real good day for us when the Swiss finally gave up trying to hold down the value of the franc.
Niels: Yeah, I can imagine. That's very impressive, well done. And I guess also in terms of when you look back at the year as a whole, we always try to evaluate things when we start at the beginning of a New Year. Because it was a year that was interesting in the sense that the industry that we say we're a part of, even though… You know, what you do is different so I don't know whether you see yourself as being a part of any particular industry, but the industry that you and I know very well, the systematic strategies if we call it that, it was a year where it did well but it wasn't caused by any major disasters like 2008 and so on and so forth. But then in those periods of time, maybe often we don't look too closely about the underlying strategies, the models themselves because everything seemed to work well. But of course we should always be skeptical. We should always look at potential new ideas. Was there anything that 2014, given the fact that you had a strong run in the beginning and obviously gave some of that back towards the end, was there anything that you learned from that experience when you look back at 2014?
Mike: Yeah, we learn all the time. I continued to learn over the last few decades, and it doesn't change. The one thing that you always learn is that it's never time to do a touchdown dance. You'll have some great performance, but you know there's going to be periods, and it could be immediately following that where your strategies get just out of line with what the markets are doing and… So from our standpoint, we've got a great model in that it allows us, it actually almost encourages or demands us to continue to develop additional strategies to incorporate into that model. And we're continuing that process. The goal is to identify strategies that will help continue to diversify the portfolio, and where we have a negative performance period like we did in the last half of 2014, and make sure that we keep good balance in the portfolio with strategies that have strong performance in that same type of environment. So it's not as much as learning anything new, as it is reinforcing what we have already been doing and giving us the ongoing confidence and drive I guess to continue to expand our research and identify new strategies that'll help us continue to diversify the portfolio.
Niels: Sure. Did you tweak the model during the year so to speak, based on what you found?
Mike: We don't really tweak, what we do is we add additional strategies to the portfolio. We had been doing that since the launch in 2011. We continued to add strategies that we think will further diversify the portfolio. So we did add some through 2014, and we'll just continue that process going forward.
Niels: Sure. Now given the fact that you started trading the strategy through a period which I think can only fairly be described as a sort of convergent type environment, where central banks were pretty unified and had very strong visions for what they wanted to achieve I guess, and a lot of determination in trying to achieve that. But in the last sort of six to nine months, this unified stance seems to have changed. A lot of people are coming out now looking at the world with very different eyes and much more divergent style. Now if these commentators are right and we're heading into a world with much more divergence than what we've seen in the last five or six years, tell me about how some of your return drivers... How will they benefit from this change in environment… or maybe I should rephrase the question and say, how will it adapt as a program to this new environment?
Mike: Yes so the… What's interesting is that as you described the convergent period, it was difficult for a lot of the systematic trend followers. It was a great period for us but in reality market divergences are better for us as well. If you don't have everything lining up and moving in the same direction, it just gives the portfolio that much better diversification opportunities. So as much as we had a difficult last half of '14, August, which was a very strong trend follower period was one of our better months we've had in the last few years. So that kind of environment where you get these divergences, you get some big moves, they can be extremely beneficial for us as well. So we welcome that kind of behavior, we welcome markets that are moving more independently of each other where the fundamentals start holding sway. From our approach with the different strategies, in general, that's a positive environment.
Niels: Yeah, now of course given the fact that it was a strong year for many of the CTA's, which can only be a positive, generally speaking. There could be a chance at least that investors, who in my opinion are probably underinvested in this strategy at the moment, that they will take another look at the area and the space. And you can certainly imagine, or at least hope for large inflows in this area. Now you've been around for a very long time, so I'd like to hear your sort of view on this. How does the industry as a whole, how do we as managers, how do we best manage a potential big inflow of assets into these strategies? Given the fact that last time that happened, they all disappeared pretty quickly as well, which to some extent causes a lot of disruption in the industry and certainly for the managers individually. But how do we better manage that, both the expectations and maybe even the asset flows themselves?
Mike: Well I think the last flow in, which was really out of the financial crisis, was a knee-jerk reaction where people had been pushing the idea of diversification of portfolios using managed futures strategies for a number of years. They were finally able to… At least the people, that they were pushing it to, were finally able to understand the value of that, after the fact. That's just how investors work, and we've got sentiment strategies in our portfolio that take advantage of the fact that the bulk of the people, the majority are wrong at the turning point, that's just what happens. So you had that environment where everybody that had long equity exposure was looking, after they lost their money of saying, "I need to diversify and get ready for that to happen when that happens again."
And then you've had a subsequent six-year period where equities have done nothing but rally, made huge money year after year after year while the money they moved out of that underperformed. So it's the worst underperformance period in the last couple of decades into the managed futures space. So typically what you have happen is people then start regretting that decision, they move, they start taking the money out and putting it back in equities.
So that's what's happened here. I don't know that you'll ever change that human behavior, but you can at least through ongoing education and hand-holding, get people to try to do the right thing for themselves and prevent them from doing the wrong thing. It's difficult, but I think it's an ongoing process. I think a lot of CTA's did a great job through this period in holding onto what they could from the money that had come in after the financial crisis, but you're fighting human nature. People want to go into what has done well, and they want to pull money out of what hasn't done well.
So you know hopefully people start viewing it as a diversifier in a portfolio, it's got a long term perspective that they take on it, and they're able to hold in there longer. I have an interesting story: I have an investor that called me in September, shortly after we hit our peak on the year. He said he was looking at increasing his allocation. He wanted... He was taking a twenty-year view on what's going on and whatever the expectations were over twenty years. Of course, I can't tell him that. I tell him what we've been doing and what we expect with our model under different environments. In the last month, he calls at least a couple times per week now that we're in a drawdown period. So his twenty-year view has shifted to day to day, and that's what I see happen on an industry-wide basis. You get some of these financial planners, or people that have moved money into managed futures and if it starts performing poorly, their evaluating that on a day to day basis, rather than understanding the reason they went into there in the first place, which is the long-term benefit.
Niels: Now you make a great point there. Actually I just had a conversation the other day with Scott Billington from Covenant, and he made the same observation but in a different way, and that is that you see investors do due diligence and they look at track records that are ten or fifteen years long and that's the basis on which they make their decision to invest in the first place. But then the decision to take the money out is usually based on a six month's performance and usually just six months of bad performance. That is completely mismatched. I mean it makes no sense that you want to make your investment decision based on twenty years of data, but you want to make your redemption decision based on six months worth of data.
Mike: That's right, that's right. It's that behavior that presents us with opportunities for profiting in the markets because they don't just do that with their managers. They do that with individual stocks or commodities, whatever it is they're trading. So that presents opportunities to make profits, but it provides a challenge in asset raising and holding onto clients.
Niels: Sure. Now Mike, you have one other hat that you have worn in the past, which is the hat of an author. And you wrote a book that I think many people have read and enjoyed, but it was about myth as far as I remember of different things. Is there anything when you look back at 2014, and you look at the book you wrote and say, "Yeah, this is exactly what I wrote about, and this is exactly happening again?" Or maybe even some of these things are being slightly… you know slowly being sort of disproved?
Mike: Yeah, the myths are reasonably permanent. The behaviors seen in 2014 where people are now increasingly getting comfortable with long equity positions and in the beginning of the year abandoning some of those hedged exposures like into managed futures that they had had in their portfolio. True enough, we've seen the myths that with market sentiment and trusting expert advice, people tend to do the wrong thing at the wrong time. So right when they could have been increasing their exposures, they've been decreasing their exposures to some of the best performing managers out there, which turned out to be some of these trend followers in the portfolio. So no, the myths I think they're reasonably timeless, I don't see them changing anytime soon or being overruled by short term events.
Niels: Sure. So you're not planning the sequel, it's still valid I guess?
Mike: Right, right, no sequel. And since it took me ten years to write the first book, don't hold your breath on the second one yet!
Niels: Okay, well you never know, you never know! Now I've only got one question left really Mike, towards the end here. I just want to give you an opportunity to bring anything up that you feel is important for the audience to be aware of as we head into 2015, both from maybe a general point of view and maybe from your strategy point of view?
Mike: Well, no I think the key just for successful investing and this year, after a number of years where trend followers did poorly. I mean we had a nice run and that attracted assets, we doubled our assets last year. It kind of keeps pointing out that people will always tend to do the wrong thing, as we just mentioned a few minutes ago. They start out with a long-term view and as soon as there's losses or they're comparing to something that's doing better than what they have in their portfolio, they start shifting to a short term view. That's just so damaging to their performance. If people could just put their money into a diversified portfolio, and managed futures is certainly a key part of that, and just not re-evaluate it on a daily, monthly or even annual basis. You know, realize that it's there for the longer term, everybody would end up with a much better performance than they do in the aggregate that they end up with.
Niels: So the funny thing is really, that the worst thing that you could do with a trend following strategy is, as an investor, trade it as a trend follower, meaning buying the high and selling the lows, which is unfortunately what people end up doing.
Mike: They do.
Niels: Now just a final question really Mike, nothing specific in my mind, but if there's anything that you could wish for in the New Year, what would that be?
Mike: Well you know, I think that from our standpoint, we just… We like the markets to be active. We like there to be what we would look at, sort of irrational behavior. I define that as behavior in markets that aren't necessarily profit driven, but people are maybe moving in and out for other reasons. Those are things that we can capitalize on, take advantage of. We don't necessarily need big long term trends like the trend followers, but we do like to see markets move, and we do like to see markets move independent as much as possible of each other. And if we can get that, I think we're in a great environment.
Niels: Sounds good, excellent. Well unfortunately our time today really is up, so for those who want to learn much more about you Mike, and of course your strategies, they can go back and listen to our previous conversation on Top Traders Unplugged. I do want to thank you for being on the podcast and sharing your insights as usual always interesting and entertaining. I want to wish you and your firm all the very best for 2015, and I look forward to catching up later in the year!
Mike: Thank you Niels!
Niels: All the best, take care!
Ending: Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you, and to ensure our show continues to grow, please leave us an honest rating and review on iTunes. It only takes a minute, and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
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Date posted: 02 Feb 2015no comments