Make diversification your β The Anti-Benchmark approach

Transcription

1 Make diversification your β The Anti-Benchmark approach CFA UK Society, 14 th October 2010

2 Agenda Introduction to TOBAM From intuition to theory Anti-Benchmark characteristics Available Anti-Benchmark equity strategies Conclusion Appendix 2

3 TOBAM: Who are we? The company: TOBAM is independent and employee-owned owned Created in 2005, TOBAM becomes subsidiary of Lehman Brothers Asset Management in 2006 Bought by employees in November 2008 TOBAM manages over $1.2 billion primarily for large, well-known pension funds, including (1) : One of the 15 largest UK pension funds Four Dutch, Swiss and Finnish Top 10 pension funds A top 15 French life insurer and the largest French health insurer (2) TOBAM provides the Most Diversified Portfolio via full diversification and neutral risk allocation TOBAM s flagship Anti-Benchmark strategies, supported by original research and a mathematical definition of diversification, provide clients with diversified core equity exposure, both globally and in domestic markets. The Anti-Benchmark methodology has been applied successfully to other asset classes. TOBAM also publishes the Maximum Diversification Index series (or MaxDiv Index) based on the Anti-Benchmark equity portfolio construction methodology. The founder: Yves Choueifaty, President & CIO (20 years investment experience) Managing Director, Head of Lehman Brothers Quantitative Asset Management business in Europe, CEO of Credit Lyonnais Asset Management (AuM 70bio), Graduated in 1992 from ENSAE in Statistics, Actuarial studies, Finance, and Artificial Intelligence. (1) Rankings based on IPE (Investment & Pensions Europe) Top 1000 European pension funds, September 2009 issue. (2) L Argus de l Assurance «Le Top 20 des groupes vie en France» and «Le Top 30 de la mutualité»,

4 What is Anti-Benchmark? Anti-Benchmark : a quantitative investment approach based on a unique principle seeking maximum diversification. The Anti-Benchmark portfolio objective: outperform the market cap index with less risk, by maximizing diversification. Definition of a mathematical measure of a portfolio s diversification: the Diversification Ratio (patent pending), Set up of an investment process that maximizes this Diversification Ratio, Long-only, no leverage and fully invested. 4

5 The Anti-Benchmark defines and maximizes diversification Return The Anti-Benchmark delivers broad equity market exposure that provides superior performance with lower risk Risk Premium Anti-Benchmark Benchmark Backed up by empirical evidence and supported by academic theory Anti-Benchmark captures the full equity market risk premium Risk (Volatility) We believe the higher returns result from better capturing of the risk premia 5

6 Anti-Benchmark: the neutral risk allocator Non-diversifiable risk is compensated by the equity risk premium Traditional market cap-weighted indices include concentration risks Concentration risk is diversifiable Concentration risk is not rewarded Investors seeking to efficiently capture the equity risk premium should not take unrewarded risks As the most diversified portfolio, the Anti-Benchmark is not diversifiable, and thus can be defined as the real Neutral Risk Allocator. 6

7 Cap-weighted indices are the generally accepted proxy for owning the market... Cap-weighted indices do have historic rationale: Published and promoted by media companies or rating agencies Easily accessed or calculated Generally accepted by investors to measure market performance Buy and hold strategy Could represent the market or the sum of all portfolios Theoretical (CAPM) support Representative 7

8 but they often take on heavy structural biases As stocks appreciate, the greater their index representation, and conversely so The greater the imbalance, the greater the impact of changes in price (volatility) Using a biased benchmark as a reference carries heavy (and costly) implicit bets These implicit bets evolve dynamically over time S&P 500: Large Cap Equity Sector Weights 40% Energy Raw Materials Industrials Consumer Cyclicals Consumer Staples Financials Technology Telecom 30% 20% 10% 0% janv.-67 nov.-72 sept.-78 juil.-84 mai-90 mars-96 janv.-02 Nov-07 Source : Factset, Russell, Standard & Poors; CRSP January November

9 which can destroy value... Market benchmarks allocate risk dynamically over time and as such are not truly diversified: Wealth creation? The market cap-weighted benchmark can also be described as a Dynamic Risk Allocator 9

10 ...resulting in an inefficient risk/return profile Empirical evidence across all geographical zones over mid to long-term investment periods: US Equity Market Euro Equity Market Annual Return (%) Annual Return (%) 40% 40% 30% 30% 20% 20% 10% MSCI US Index 10% DJ EuroStoxx Index 0% 0% 10% 20% 30% 40% Annual Volatility (%) 0% 0% 10% 20% 30% 40% Annual Volatility (%) Source : Factset. All returns are stated in local currency. MSCI and DJ EuroStoxx indices are net of dividends. May May

11 Anti-Benchmark - construction examples Each risk factor should contribute equally to portfolio volatility Consider a two stock example: Correlation Volatility Stock A Stock B AB Weights Stock A 30% 1 0.6? Stock B 15% 0.6 1? Consider a three stock example: Correlation Volatility Stock A Stock B Stock C AB Weights Stock A 20% ? Stock B 20% ? Stock C 20% ? Source: TOBAM. 11

12 Anti-Benchmark - construction examples Each risk factor should contribute equally to portfolio volatility Consider a two stock example: Correlation Volatility Stock A Stock B AB Weights Stock A 30% /3 Stock B 15% /3 Consider a three stock example: Correlation Volatility Stock A Stock B Stock C AB Weights Stock A 20% % Stock B 20% % Stock C 20% % Source: TOBAM. 12

13 From 3 stocks to n stocks: generalization TOBAM believes that a portfolio diversified across all the risk factors present in the market will provide better access to the market risk premium over time. TOBAM s unique Diversification Ratio measures the diversification of a portfolio or index across sources of risk not across individual stocks: DR( P) = Σ. P t PVP = The weighted average of stock volatilities ( σ w + σ w σ ) σ P n w n X 1,X 2, X n σ i P = (w 1, w 2, w n ) Σ = (σ 1, σ 2, σ n ) V C = Risky assets in universe U = Volatility of asset i = The vector of asset weights = The vector of asset volatilities = Covariance matrix = Correlation matrix Portfolio Volatility The Diversification Ratio has no dimension and is thus free of biases toward high or low volatility stocks. 13

14 Characteristic 1: no dimension The Diversification Ratio avoids biases toward low or high volatility stocks, thus allowing portfolios to potentially capture growth while limiting risk: Correlation Minimum Volatility Stock A Stock B AB Weights Variance Weight Stock A 30% % 0% Stock B 15% % 100% 14

15 Characteristic 2: the Sharpe Portfolio under 1 hypothesis AnnualReturn(%) AB If risk is homogeneously remunerated across the universe, then Max DR(P) Max ( σ w + σ w σ ) σ Max ER( P) σ P Max Sharpe Ratio P n w n Annual Volatility (%) Anti-Benchmark 15

16 Anti-Benchmark - number of holdings The TOBAM team constructs a maximum diversification portfolio that has an equal and lowest-possible correlation with its constituent holdings, and for which all excluded assets would boost the correlations, if included. - Article Beyond Cap Weight by Rob Arnott, Research Affiliates Inc., Journal of Indexes January/February 2010 Annualised Volatility Risk Diversification 70% 60% The market capitalisation index ranks stocks irrespective of diversification. Even a large number of stocks are not able to achieve diversification 50% 40% 30% 20% 10% 0% Number of Stocks Anti-Benchmark SM targets full diversification. A smaller number of stocks is enough to achieve maximum diversification In the case of this example (universe of 50 stocks), minimum risk is achieved between 10 and 30 stocks Source: TOBAM, Factset. The above chart is for illustrative purposes only. 16

17 Available Anti-Benchmark equity strategies The strategies are available via: Segregated accounts Ucits III pooled funds Source: TOBAM. Past performance is not indicative of future results. All returns are gross of fees. * paper portfolio - fund to be launched Q

18 Make diversification your β Anti-Benchmark SM is an active, systematic, comprehensive solution to: Create the most diversified portfolio Deliver stable performance across market cycles Capture the full risk premium available for a given asset class 18

19 Conclusion P = β B + α Investors spend most of their time identifying sources of alpha, while the lion s share of volatility and performance comes from «β B». The consequence of this paradox has been the rapid development of index management but cap-weighted indices are clearly inefficient. Credible alternative approaches to index investing have been successfully developed, and should evolve from satellite to core position over time. Watch your Beta! 19

20 Appendix 20

21 Anti-Benchmark implementation Most Diversified Portfolio Portfolio Construction Quantitative Research - Anti-benchmark theory - Portfolio applications Market Reference Index - Liquidity Filter - SRI Filter (optional) Optimisation 1. Maximum Diversification portfolio optimisation 2. Algorithm generates optimal stock weightings 3. Turnover reduction strategy Apply model across portfolios: 1. Internal limits 2. UCITS III limits 3. Client guidelines Execute buys and sells Generate orders 1. Performance review & analysis 2. Innovation/ Research Risk management process: integrated and continuous Ex-ante: - Backtest portfolio risk/return profile - Set client guidelines Ex-ante: Ensure liquidity Real-time: Compliance checks Ex-post: Weekly risk report Performance attribution and analysis Research and CIO Portfolio Managers Risk Officer, Portfolio Managers, CIO *PILOT is TOBAM s internally-developed, proprietary front office system written in Java, which provide straight through processing for all components of the investment process, including trading, compliance and reporting modules. 21

22 Reporting AB Euro equity portfolio analysis (1/4) as at 30 th September 2010 Source: TOBAM. Returns are gross of fees and stated in EUR. The risk free rate of return is calculated using the one month LIBOR rate of the relevant base currency of the fund. Returns reflect back tested data from Dec 31, 1991 to Jun 30, 2006, plus live data for the TOBAM Anti-Benchmark Euro Equity Fund (AB) from Jun 30, 2006 to date. Back tested results are for information purposes only. They are intended to illustrate how the Strategy would have behaved over the period had it been launched prior to Jun 30, The simulations are gross of tax and exclude costs of transaction and fee assumptions. Past performance is not indicative of future results. 22

23 Reporting AB Euro equity portfolio analysis (2/4) as at 30 th September 2010 Source: TOBAM. Past performance is not indicative of future results. All returns are net of fees and stated in EUR. Returns may increase or decrease due to currency fluctuations. 23

24 Reporting AB Euro equity portfolio analysis (3/4) as at 30 th September

25 Reporting AB Euro equity portfolio analysis (4/4) as at 30 th September 2010 Source: TOBAM. Past performance is not indicative of future results. All returns are net of fees and stated in EUR. Returns may increase or decrease due to currency fluctuations. 25

26 PILOT proprietary front office system Initially developed to automate portfolio management and trading PILOT s success led to widespread application across the company (risk management, compliance system, performance attribution, CRM, ) 26

27 TOBAM Executive Committee members Yves Choueifaty President TOBAM, CIO, Exec. Committee (20 yrs investment experience) Mr. Choueifaty built TOBAM in 2006, as Managing Director, Head of the Quantitative Asset Management business in Europe, and Head of Lehman Brothers Asset Management France. Prior to joining Lehman Brothers, Mr. Choueifaty was CEO of Credit Lyonnais Asset Management ( CLAM, AUM 70B), now known as Amundi Asset Management. He was CIO of CLAM from 2000 with direct responsibility for all aspects of the Investment Management process as well as Marketing and Sales. From 1998 to 2000 Mr. Choueifaty was Head of Financial Engineering and Quantitative Investment Management having developed the structured products and financial engineering business units since Mr. Choueifaty graduated in 1992 from ENSAE in Statistics, Actuarial studies, Finance, and Artificial Intelligence. David Bellaiche Head of Portfolio Management, Exec. Committee (13 yrs investment experience) Mr. Bellaiche joined the TOBAM team in 2006 as a portfolio manager from Credit Agricole Asset Management ( CAAM ), now known as Amundi Asset Management, in Paris. Most recently he was a portfolio manager at CAAM within the Arbitrage and Convertible Bonds team. Prior to that, he ran the CAAM quantitative analytics and technology teams consisting of 60 engineers and programmers. During the merger between Credit Lyonnais Asset Management ( CLAM ) and CAAM, Mr. Bellaiche led the IT and quantitative analytics transition between the companies. Mr. Bellaiche started at CLAM in 2000 as the Head of IT Research and Development and he began his professional career in February 1997 as a systems developer at IBM in France. Mr. Bellaiche received his Diploma of Engineering from ENAC, Toulouse, France in Tristan Froidure, MBA Head of Research, Exec. Committee (13 yrs investment experience) Mr. Froidure joined the team in April 2007 as senior portfolio manager. Mr. Froidure joined from Lehman Brothers International (Europe) Capital Markets where he was responsible for devising systematic, quantitative strategies applicable to options. Prior to that, he was senior portfolio manager at LibertyView for 7 years, a Lehman Brothers-owned Hedge Fund based in the United States where he was head of international trading, and co-responsible for launching and managing LibertyView s Global Volatility Fund, a $350 million Hedge Fund. Mr. Froidure received his diploma of Engineering with a Non-Linear Mechanics major from the Ecole Centrale de Lyon in 1996, and received his MBA from New York University's Stern School of Business in Christophe Roehri Head of Business Development, Exec. Committee (13 years investment experience) Mr. Roehri joined the team in 2009 as Head of Sales France; prior to this he spent three years at Credit Agricole Asset Management in Paris before joining Fortis Investments as an institutional sales director. Christophe was also employed by the Credit Lyonnais group in Indonesia ( ) and New York ( ). He is a graduate of EM Lyon. 27

28 TOBAM contacts Christophe Roehri Client Service Head of Business Development +33 (0) clientservice@tobam.fr Christophe.Roehri@tobam.fr TOBAM Marketing Partners: Morella Hessels Benelux Business Development Nordics - Paxstone Capital LLP Kasper Kemp Hansen kasper.hansen@paxstone.com Morella.Hessels@tobam.fr Johan Stromberg johan.stromberg@paxstone.com Tel Laura Vu Thien UK Business Development Canada - Investeam Nancy Nightingale nancy.nightingale@investeam.ca Laura.VuThien@tobam.fr Tel Australia - Phoenix Capital Advisory Ltd. Mark Jackson mark.jackson@phoenixcap.com.au Matthew Wormald matt.wormald@phoenixcap.com.au Tel

29 Disclaimer This document is intended only for the person to whom it has been delivered. This document is confidential and may not be reproduced in any form without the express permission of TOBAM and to the extent that it is passed on, care must be taken to ensure that any reproduction is in a form which accurately reflects the information presented here. Whilst TOBAM believes that the information is correct at the date of production, no warranty or representation is given to this effect and no responsibility can be accepted by TOBAM to the recipient of this document or end users for any action taken on the basis of the information contained herein. We do not represent that this information, including any third party information, is accurate or complete and it should not be relied upon as such. No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness. Opinions expressed herein reflect the opinion of TOBAM and are subject to change without notice. This document is for information purposes and does not constitute advice or a recommendation to enter into any transaction or an offer or an agreement, or a solicitation of an offer or an agreement, to enter into any transaction, nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract for the same. Before entering into any transaction, you should consider the suitability of the transaction to your particular circumstances and independently review (with your professional advisers as necessary) the specific financial risks as well as the legal, regulatory, credit, tax and accounting consequences of entering into such transaction. The value and the income produced by a strategy may be adversely affected by exchange rates, interest rates, or other factors so that an investor may get back less than he or she invested. Past performance is not necessarily indicative of future results. This document is issued by TOBAM which is authorised and regulated by the Autorité des Marchés Financiers ( AMF ). TOBAM October