By Tristan Froidure, Head of Research
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:
Theoretical research, which includes portfolio construction, (essentially) convex optimization, statistics & econometrics.
Implementation research, in order to develop and refine the Anti-Benchmark approaches.
Generalization research: apply research results to other environments.
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.
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.
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.
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).