Next-Finance: Many research articles, in particular the study entitled "Survey of Alternative Equity Index Strategies" by Tse-man Chow, Jason Hsu, Vitali Kalesnik, and Bryce Little, shows that over a long period of time, Smart Beta strategies generate a higher return than cap-weighted indices. Most of these studies were conducted for equity markets. Are there any similar studies for bond markets?
Yves Choueifaty: Yes, there are similar studies for bond markets. Last year, Research Affiliates was a pioneer in offering Smart Beta bond strategies.
A large part of bond investors do not need to maximize their mark-to-market (preference is given to capital preservation, coupons, etc ...) ... What type of investor are Anti-Benchmark bond strategy appropriate for? To satisfy which specific need?
Our Anti-Benchmark bond strategy is designed for investors seeking to compensate their risk by capturing the credit risk premium. The investment universe is the Merrill Lynch US Corporate High Yield and Total Return. Our approach is a solution for investors seeking diversified exposure to the US credit market.
It is important to note that the Diversification Ratio® is a dimensionless ratio and has no bias toward low or high volatility assets.
Yves Choueifaty, Founder and President, TOBAM
Your Anti-Benchmark approach is based on the Diversification Ratio® concept. Could you explain what is the Diversification Ratio®?
The TOBAM Diversification Ratio® is a tool to measure the diversification of any portfolio P, with a number n of assets.
DR (P) = combination of the risk / risk of the combination
DR (P) = (w1?1+w2?2+........wn?n)/?P
with
- wi = weight of asset i
- ?i = volatility of asset i
- ?p = portfolio volatilty
It is important to note that the Diversification Ratio® is a dimensionless ratio and has no bias toward low or high volatility assets.
The TOBAM’s "Anti-Benchmark" Most Diversified Portfolio® maximizes the Diversification Ratio®. What is the advantage of the the Diversification Ratio® maximization within the investment universe?
Yes, absolutely, we seek to maximize the Diversification Ratio®. Our “Smart Beta" strategy is designed to maximize diversification of any given investment universe. It enables us to build a truly unbiased portfolio, unlike market-cap weighted indices, and improving the risk / return portfolio.
Beyond a different investment universe (Euro Sovereign vs Corporate US), what are the main advantages / disadvantages of the Anti-US Credit Benchmark® approach vs a EuroMTS AAA Macro-Weighted euro bond indices approach weighting countries regarding their Debt / GDP and Current account balance / GDP ratios, quarterly GDP growth and long-term interest rates ?
The main advantage is to build a portfolio without "bias" towards highly indebted issuers or those belonging to a particular industry. Indeed, for example, we should be aware that financial companies are significantly over-represented in the US Credit index. Therefore, our strategy is to invest in the most diversified portfolio possible and avoid this type of "bias".
In the short term and in certain market conditions, it may be worth investing in sovereign bond indices; the risk premium is more difficult to identify for investors. From an economic aspect and for investor benefits, it is better to invest in wealth creation from companies than maintaining unsustainable excessive deficits.
Correlation is an unstable parameter over time, depending on the time period chosen. It is the same for portfolio weightings performing an optimization of the portfolio correlation. The Maximum Diversification approach seems to have a high portfolio turnover. Have you taken into account these fees in your backtestings?
Our portfolio turnover stands at 30 to 40% per year, bearing in mind that we invest directly in equities and do not use derivatives. Of course, our fees are taken into account in the calculation of the net asset values of our portfolios; portfolios are generally rebalanced on a monthly basis.
What is the liquidity portfolio ? What is the maximum capacity of the Anti-Benchmark® US Credit Fund ?
Our products have daily liquidity with no lock-up period in case of client redemptions. We believe that the maximum capacity of the Anti-Benchmark® US Credit Fund could reach several billion dollars.
Yves Choueifaty, Founder and President, TOBAM
You want to strengthen your business in North America in order to increase your US assets to 50% (from 23% right now). Your main clients are American, Swiss and Dutch pension funds and French investors represent only 9% of your assets under management. How do you explain this discrepancy? Are the French institutional less technical / more cautious on quantitative strategies? Are those needs different?
The heavy weight of our international client base is explained by the relatively "small" size of the French market. Due to the near absence of pension funds despite pension liabilities in our country: according to the OECD, in late 2012, pension funds weigh 0.3% of the GDP in France vs 160.20% and 113 60%, respectively in the Netherlands and Switzerland, for example, productive investment needs (equities, private sector bonds) are artificially lower. French institutional investors are not less technical or abnormally more cautious on quantitative strategies.
In terms of household savings as the bulk of household savings is being sterilized in riskless financial product, such as Euro funds from life assurance companies or regulated financial products as “livret A” or “PEL” because of tax incentives (see quarterly study from the Bank of France), needs in equity investment solutions are lower.
You have currently $ 6 334 million under management. What are your medium-term objectives? What are your key developments in the future?
We do not have objectives in terms of assets under management (AUM), but we would be happy if our AUM reaches the $ 10 billion mark in Q1 2015. We would like to see the Asia and the Middle East regions, currently about 1% of our AUM, ultimately represent approximately 15% of our AUM and North America 50%.
