What is the practical application of this? A conversation with Bob Schmidt, the manager of the Brandes Institute
Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital
Good Morning Listeners,
Today is a very special episode with Bob Schmidt, the manager of the Brandes Institute. Bob is responsible for overseeing the project research and analysis, developing publications and presentations, and special events for Brandes Institute. Prior to this, he was the head financial writer at Nicholas-Applegate. Bob is a graduate of Duquesne University with a BA in English and a Master from California State University San Marcos. In this conversation, we discuss the research of the Brandes Institute.
Below is an excerpt from our conversation.
RP: “Can you tell me more about other research that the Institute is working on for future topics?”
Bob: “Yeah there is one piece where the paper is almost done and the topic is Bond Active Risk. A little back story on this, where we look at risk measures in our industry. The one that jumps into mind is volatility and standard deviation. This is what people tend to focus on which to us is very performance related. We ask is that the best thing that we should be focusing on? Is it the returns as a gauge of how risky a portfolio is or should we be looking at the holdings? So we took that notion and applied it to bonds. We were looking for something that was relatively simple and would also be insightful. So we did some research and we looked at about 50 funds from 2002 to 2016. What we were looking for was their exposure in terms of duration and credit quality. We thought that those were 2 measures that you can use to look at a bond portfolio and say okay is this really risky. Forget the returns, what is it holding? In our research what we found is after 2008, the start of the financial crisis, most bond funds took more credit risk and they shortened their duration. Some coming back to the title, Bond Active Risk, that is simply the percentage of time a fund was really aggressive in terms of its duration or credit exposure. So if this bond fund had really long duration relative to its peers, relative to the benchmark, really aggressive credit exposure, its going to have a really high bar score. The highest will be 100. That means that 100 percent of the time you are very aggressively positioned versus not so aggressively positioned if your bar is 0. We then looked at performance for these 48 funds over this period and plotted them in terms of volatility and bar. So here is this tool that everyone is using, volatility and here is this new tool that we are introducing, bar. In our study, we found only 1 of these top quartile performers had 0 bar. Many of the top performers had low volatility but very high bar. So to me that says there are many funds that are positioned where their duration exposure and their credit exposure is minimal. They are adding alpha through, you know the only other lever you can pull there is issue selection. There is a lot of funds out there where their bar is high and that has contributed to great returns but in looking at that you have to ask, can those managers continue to be successful of making these aggressive type positions.
Also you can listen to this on
1:16 – Can you tell me about your back ground and what led you to finance and investments?
2:16 – What led you to Brandes Institute and what is your current role there?
3:56 – What are the topics that the Institute researches and how do you generate ideas for researching your topics?
7:27 – Can you tell me more about the approach that Brandes Institute takes in their research process?
12:56 – For the behavior investing, are their any topics you are excited about?
17:53 – You recently wrote a white paper and you pose a question, “What are the characteristics or attributes that are required to enable an investment organization to successfully pursue long term opportunities?” Can you tell me about that?
29:26 – Can you tell me more about other research that the institute is researching?
36:36 – On a personal level, do you follow a particular investment philosophy and how would you characterize your approach?
43:45 – How would you define risk?
49:15 – What are you favorite books?
Enjoy and thanks for the listen!
