Why Return Drivers Beat Morning”Stars”

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Brandywine Asset Management commentary forr the third quarter ended October 31, 2017.

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Brandywine’s Outperformance and Non-Correlation vs. CTAs

Since the launch of the Brandywine Symphony program in 2011, Brandywine has outperformed all the major CTA (managed futures) indexes - while doing so with a non-correlation of -0.06. 2017 is another example of both this outperformance and non-correlation. While the managed futures indexes posted negative performance through Q3, Brandywine posted profits. But when the CTA indexes rebounded with strong profits in October, Brandywine also posted strong profits. We are not negatively correlated-we are non-correlated. This is the result of our mutIi-strategy Return Driver based approach. This performance confirms our belief that Brandywine serves as an excellent core diversifier for both managed futures and equity portfolios.

Why Return Drivers Beat Morning"Stars"

There's been a lot of fuss and counter-fuss (if that’s a ‘thing’) following the October 25th report in the Wall Street Journal about the ineffectiveness of Morningstar’s star ratings at predicting mutual fund performance. It’s hard for us to understand why this is a fuss at all. Did people really think that a rating system that looked at past performance, and not at the underlying Return Drivers that produced that performance, would be predictive at all? Of course not. You can get just as much non-information by looking at the Sharpe Ratio or any number of other historical statistically-based measures.

What the Journal pointed out was that funds that got rated five stars, the highest possible, performed only ‘average’ in the years following the rating. In fact, over the ensuing five years the five star funds were even more likely to get two stars (below average) than five stars. Yet many financial advisors used the star system to sell various funds to their investors.

In fact, as one hapless financial advisor stated ”With rare exception, we would want a fund to have five stars." Another said that when he reached an impasse in explaining the funds workers should employ in their retirement plans, ”he decided to keep it simple and told them, ‘You only have two funds rated by Morningstar-one’s a two-star and one’s a four-star. Go with the four-star.’ He could see a look of understanding flash across their faces.”

There is only one way to gain an understanding of the soundness of an investment program or fund and its potential for future returns. That is to understand the underlying Return Drivers that power its performance. In the case of the vast majority of the funds ranked by Morningstar, which hold long positions in global equities, for periods of less than 20 years the dominant Return Driver is investor sentiment towards holding stocks. That driver has historically shown mean-reversion tendencies. Strongly optimistic periods are followed by pessimism. As a result, you should fully expect the behavior you see withl Morningstar’s system. As the specific style employed by each fund falls in and out of favor, so too will their rankings.

Brandywine's trading programs incorporate dozens of trading strategies based on sound, logical Return Drivers. This results not only in uncorrelated returns, but also performance that is independent of any specific market condition. In fact, some of Brandywine’s strongest returns have been produced while other funds have faltered. This adds further to the value Brandywine brings when added to traditional investment portfolios.

As always, if you’d like to learn more about Brandywine’s innovative approach, we encourage you to contact us by calling or emailing us at our address listed in this report’s header.

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(Non) Correlation (highlighted in table at right) of Brandywine’s Investment Programs to Other Investment Indexes

It is this non-correlation - combined with Brandywine's repeatable investment process and broad strategy and market diversification - that makes Brandywine such a positive addition to most investment portfolios.

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Descriptions of the Brandywme Investment Programs

Brandywine trades pursuant to a fully-systematic model that incorporates a wide range of both fundamental and technical trading strategies. Brandywine’s Symphony Program began trading in July 2011 and the performance of the other programs is extracted from the actual performance of trades executed within the Brandywine Symphony Program. ”Brandywine CPU” is the composite performance that could have been achieved by allocating across all four Brandywine programs.

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