Decades of academic studies since Harry Markowitz (1959) and William Sharpe (1964) have explained why diversification should play a key role in portfolios’s asset allocation.
Yves Choueifaty after years of academic research introduced a measure of diversification: the Diversification Ratio®. The details of this were initially published in 2006 in the United States Patent and Trademark Office (Choueifaty, “Methods and Systems for Providing an Anti-Benchmark Portfolio, May 2006) and later in 2008 in the Journal of Portfolio Management [Choueifaty & Al, “Toward Maximum Diversification” Fall 2008].
TOBAM’s Anti-Benchmark® strategy is based on the Maximum Diversification® approach, designed to maximize the degree of diversification when selecting the weighting of assets in the portfolio allocation process. The Diversification Ratio® is maximized to produce a portfolio designed to access risk premium evenly from all the effective independent sources of risk available in the market at any given time. TOBAM’s approach is fully quantitative and does not use any predictions of expected return, neither for the assets nor for any underlying risk factors.
The Anti-Benchmark® strategy is designed to create portfolios proposing to lie closer to the ex-post efficient frontier than the market cap portfolio over a market cycle. Anti-Benchmark® portfolios access the available risk premium in a risk efficient manner and intend to typically enhance performance vs. the benchmark by 3%-5% p.a. via greater diversification for equity portfolios, while also reducing volatility by 20-30% per annum over a market cycle. For credit portfolios, the strategy endeavours to outperform the benchmark by 1-2% per annum with less volatility as well.
The Maximum Diversification® approach and Anti-Benchmark® model were developed and refined in-house, and are maintained by the Research team. 18 investment professionals are involved in research, working on a day to day basis to increase the theoretical foundation for the Anti-Benchmark® investment approach – making it one of the largest, if not the largest, research team dedicated to a single investment strategy in the asset management industry. Research is organized around three areas (theoretical support, implementation innovation and product research)
TOBAM’s research effort is led by Tristan Froidure, who has over 18 years of investment experience researching and developing quantitative investment and trading strategies. The research department makes recommendations to the Executive Committee on potential improvements in the implementation of investment strategies. The Head of Research works closely with Yves Choueifaty to set the company’s research agenda.
In the 1930s a group of French mathematicians came together to reformulate modern mathematics from a perfectly rigorous, self-contained point of view. The group used the pseudonym Nicolas Bourbaki.
Here at TOBAM, we believe in what we call ‘the Bourbaki spirit’. We share Bourbaki’s refusal of concepts that are not precisely defined. We dedicate a significant amount of time focusing on definitions, which we view as a prerequisite to conducting sound and original research work.
This means we avoid using conventional wisdom when it uses unclear definitions. While our goal is not to produce an encyclopaedic and formidable body of work such as the “Éléments de mathématique”, this spirit has a distinctive influence on our approach. Our common research path involves going from clear definitions to establishing mathematical properties and then – and only then – conducting empirical tests to verify what could be expected from theoretical results.
Having these high research standards, we place a lot of efforts on research and have built a team of researchers and portfolio managers – who participate in or lead research initiatives – that are highly skilled, experienced and diversified. The three main research axes of our research team are:
We work with some of the most sophisticated institutional investors in the world and we consider that applying our expertise and research capabilities to their complex challenges is a crucial step in building a solid and grounded research team. On top of our three main research axis, we hence spend a significant amount of our research efforts finding customized answers to challenging issues raised by our clients, in an effort to ensure no stone is unturned.
A diversified and effective research team
The team is encouraged to be as “out of the box” in its approach to ‘conventional wisdoms’ as possible. As such the diversity of the team is a critical part of how well it functions. We have a large range of expertise, from highly skilled mathematicians, engineers, economists, traders, all of which feeds in to the team’s ability to look at problems or assumptions from a very broad spectrum of viewpoints. Furthermore, research is conducted without a formal hierarchy. When it comes to their work, researchers are encouraged to exchange and develop ideas free from the constraints of a pecking order, which affords the team considerable freedom in their research approach and takes full advantage of the diversity of the team.
The team has a strong academic contingent, but our main goal is to focus on our own research projects and to focus less on academic literature to feed into our research process. In fact, publishing our results in the form of academic level papers internally is one of our main research goals. Indeed, the process of summarising our findings provides additional coherence to our work, and helps us focus on delivering research of the highest standard.
We first share our findings with our clients, which contributes to set the foundations of a knowledge sharing spirit. We have also published articles in journals to benefit from open debate from time to time. In the end, our ultimate agenda is to serve our clients and being fully dedicated to their needs and projects.
Research Transparency: an intelligent investment
TOBAM’s flagship portfolio construction method (Most Diversified Portfolio, or MDP) has been published for all to see. In fact, we like to think of ourselves as a ‘crystal box’, disclosing and openly discussing what we do with our clients. In today’s financial world, which has been rocked by a series of scandals, clever transparency is a winning bet. I think we would have fewer assets under management if we operated as a ‘black box’. Being transparent has also helped us systematically focus on and improve the weakest parts of our approach – a chain is only as strong as its weakest link.
Finally, we have always viewed transparency as a necessary condition for being taken seriously by large institutional investors.
We believe that the real world incarnation of the MDP under the brand “Anti-Benchmark” has the potential to replace traditional market capitalization weighted benchmarks as a core portfolio. This is thanks to its intrinsic qualities, and to the many resources TOBAM dedicates to transparent research.
Simple ideas are beautiful
I personally believe that the “best” ideas are simple, in Khalil Gibran’s sense: “The obvious is that which is never seen until someone expresses it simply.” Take for example the notion of Portfolio Diversification which TOBAM first introduced in 2006. Its formulation is very simple and is becoming obvious today to Asset Management practitioners, academics and students. Ten years after its first publication, the research we are conducting today is still leading us to very exciting new results that are directly connected to it.
 Poet and writer, author of “The Prophet” (1923).
We publish on a monthly basis, the diversification dashboard, which presents the Diversification ratios for each strategy-related investment universes as well as a different research topic debated each month to improve our client’s awareness and grasp on our Maximum Diversification® approach and Anti-Benchmark® strategy.
We are very ambitious in the way we think of delivering solutions to clients, and strive to fully deliver TOBAM’s resources and knowledge. We believe in transparency and in the value created by sharing the research that underpins our investment processes with our clients.