William Blair – A Game-Theoretic Framework For Managing Macro Risk

by Robert Huebscher

The William Blair Macro Allocation Fund (WMCNX) seeks to capitalize on global opportunities through active management across asset classes, geographies, currencies and risk themes. Since the inception of the fund on November 29, 2011, it has had an annual return of 5.41% (as of 8/31/16), beating its index, BofA Merrill Lynch 3-Month U.S. Treasury Bill Index, by 531 basis points over the same period. The investment team has also put together another index more in line with its targeted return profile (40% Bloomberg Barclays U.S. Aggregate Index, 30% MSCI All Country World Index (net), and 30% Bank of America/Merrill Lynch 3-month U.S. Treasury Bill Index) which it has also beaten by 115 basis points over the same time period. The management team first uses fundamental analysis to identify value/price discrepancies, which reveal where opportunities exist. It’s the next step in the investment process where the investment team uses game theory to understand and assess geopolitical risks and how they will impact portfolio performance.

William Blair Macro Allocation Fund
Chart source: William Blair

Thomas Clarke is portfolio manager on the Dynamic Allocation Strategies (DAS) team. In this role, Tom shares, with co-manager Brian Singer, ultimate responsibility for strategy setting and portfolio construction across all DAS portfolios. Before joining William Blair in 2011, Tom was a member of Singer Partners’ investment team with a special focus on currency strategy. Until 2009, Tom was a managing director and head of currency analysis and strategy for the global investment solutions team of UBS Global Asset Management. There, he set currency strategies for multi-asset, global and international equity and fixed income portfolios and developed and oversaw the currency analysis process. Tom was also a member of the global asset allocation and currency committees and the U.K. investment committee. Before joining UBS in 2000, Tom was head of currency for Rothschild Asset Management, where he spent 10 years as part of the fixed income and currency group.

I spoke with Tom on September 12.

You are a portfolio manager on the Dynamic Allocation Strategies team and a co-manager of the Macro Allocation Fund. What is the mandate of the fund, and how is your team organized?

The team is organized in Chicago, London and Zurich. We’re a 13-person team. Most of us have worked together for about 17 years, and we were originally at UBS before we came to William Blair five years ago. That includes me and Brian Singer, the other portfolio manager for our fund.

The mandate of the fund is to seek real returns at below equity market risk using macro, top-down exposures across the developed and emerging equity world, fixed income, credit and currencies, It’s all top-down; we’re not buying and selling individual bonds or picking stocks. We’re investing at the country, asset class and sector levels. We do currencies as a separate investment decision.

You and Brian have recently published research on the application of game theory to fund management. What was the genesis of that effort?

The genesis of that effort was that we sought a way of understanding and navigating geopolitical risks as they affect market prices and exchange rates. Most everybody, across the investment community, agrees that geopolitical risks are very important and influential on markets, but there is not much consensus about how to account for those risks in managing portfolio exposures. We developed a framework that uses game theory to assist us in that effort.

One of the pieces that you published is a take-off on the story of Rocky and Bullwinkle. Can you talk about how that ties into your assessment of the macro landscape, and how it affects the way you invest?

The Rocky and Bullwinkle example is a somewhat humorous, non-investment scenario that brings out the features of the way we look at geopolitical scenarios that are influential on investment management. What we are seeking to do with this framework is not to discover information that nobody else knows, but rather to better organize the same information that everybody knows so that we can be less surprised by geopolitical outcomes and a little bit more anticipatory of their investment implications.

To that end, whether we are dealing with Rocky and Bullwinkle, which wasn’t about investments, or with policy negotiations between leaders, political maneuvering, referendums or even military situations, we set up a framework where, in line with the example of Rocky and Bullwinkle, we seek to identify the primary players in the negotiating game. All of these situations can be thought of as multiplayer, strategic interactions.

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