Fiera Capital Diary of an Investment Risk Manager

1
Fiera Capital Diary of an Investment / Risk
Manager
December 2nd, 2008
2
Experience

• Life Insurance and Annuities at Metlife (95-99)
• Segregated Funds and Marketing at Desjardins
  (99-02)
• Quantitative Portfolio Management at Elantis
  (02-03)
• Judgemental Portfolio Management at Fiera (03-now)

3
Current Responsibilities

• Tactical Asset Allocation (more than 6 B of
  assets)
• Global Macro Fund
• Assistant CIO (Asset Allocation and Fixed Income)

4
Current Investment Beliefs

• Aim for Harmony with Markets
• Too early or too late does not work
• Markets are Right, not Efficient
• Price clears at the end of every day
• Probability assessment is where edge can be
  gained
• Good Money Management System is Key
• System that reduces probability of ruin
• Losses reduce size of positions

5
Evolution to the Current Market Environment

• Securitization
• Leverage
• Fall in Real Estate Prices
• No Risky Asset Increasing in Price
• Deleveraging
• Credit Freeze
• Economic Recession

6
Diary

• Over the last 6 months
• We have been in general harmony with the markets
• We were wrong on many aspects
• We have learned more about financial markets than
  over the last 10 years
• We feel time has compressed (1 day 1 month)

7
Matrix of Expected ReturnMay 2008

• Views
• Economic slowdown is coming
• Rest of World will not decouple
• Oil is behaving weird

• Positions
• Short of risk assets (equities, carry trade)
• Long short-term bonds
• End Results
• Stopped out of positions all month, stopped out
  of strategy at end of month
• -2.4 for month, 4.1 year-to-date

8
May Thoughts

• Avoiding short term underperformance is key to
  long term outperformance (May 12)
• Contango heats up inflation expectations (May 13)
• Be humble about your ignorance (May 14)
• Good investors do not react emotionally (May 16)
• Needs realization go from safety, love, esteem
  and finally actualization (May 21)
• When the cost of financing is greater than
  expected returns, naked players get disrobed (May
  22)
• Pride should not enter into investment decisions
  (May 23)
• Tipping point has 3 characteristics, the law of
  the few, the stickiness factor and the power of
  context (May 26)
• Enter the vicious cycle of uncertainty and
  foolishness about random events (May 27)
• Persistency remains a hallmark of financial
  variables (May 28)
• Life is like a box of chocolate, you never know
  what youre going to get (May 29)
• Overwhelming fact knowledge with cause and effect
  relationship builder Underwhelming humility and
  absence of non-linear relationship understanding
  (May 30)

9
Matrix of Expected ReturnJune 2008

• Views
• Economic slowdown is coming, no decoupling
• Credit crisis will morph into credit cycle
• Emerging market inflation is strong
• Oil entered a bubble on June 6

• Positions
• Short risk assets (short equities)
• Short decoupling (short EUR)
• Long oil (long CAD)
• End Results
• Added to positions during the month
• 3.94 for month, 8.04 year-to-date

10
June Thoughts

• New month has arrived, lets celebrate with
  action (June 2)
• When in tune, go for the moon (June 3)
• In a bubble, you can be long at your own risk, on
  the sidelines or long with risk reversals in
  place (June 9)
• It is a beautiful day (June 10)
• Getting into a good trade that does not work is
  much better than getting into a bad trade that
  works (June 17)
• Le savant sait quil ne connaît rien, linnocent
  croit quil connaît tout. (June 30)

11
Matrix of Expected ReturnJuly 2008

• Views
• Economic slowdown is coming
• Increasing inflation in emerging markets
• Commodity markets should be very volatile

• Positions
• Short risk assets (short equities)
• Yield steepener (long short part of curve, short
  the long part)
• End Results
• 2.65 in month, 10.97 year-to-date

12
July Thoughts

• The 2 most powerful warriors are patience and
  time (July 14)
• Helicopter Ben, Bazooka Hank think they are the
  Winston Wolfe (Pulp Fiction - I solve problems)
  of finance (July 20)

13
Matrix of Expected ReturnAugust 2008

• Views
• Economy is slowing faster, decoupling is dying
• Commodity pass-through is accelerating but
  commodity prices are falling
• Government is ready to intervene

• Positions
• Short decoupling (long USD)
• Short risk assets (short equities)
• End Results
• Our US dollar position really worked during the
  month
• 3.75 during month, 15.13 year-to-date

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August Thoughts

• Market prices do not deviate from a theoretical
  equilibrium level in a random manner, fear and
  greed drive the process (August 1)
• Perception is reality and reality affects
  perception, virtuous cycles are followed by
  vicious cycles (August 6)
• Expect the unexpected (August 8)
• Right about probability, wrong about timing can
  hurt you (August 12)
• For infinite periods, the Martingale man is
  guaranteed to be bankrupt (August 14)

15
Matrix of Expected ReturnSeptember 2008

• Views
• Economy is slowing faster, decoupling is dying
  and deleveraging is gathering pace
• Geopolitical risk is underestimated
• Credit is deteriorating

• Positions
• Short risk assets
• Yield steepener (long short part of curve, short
  the long part)
• End Results
• Really good month, our risk envelope increased
  quickly but we did not add to our risk ending the
  month with no position
• 7.56 for the month, 23.83 year-to-date

16
Matrix of Expected ReturnOctober 2008

• Views
• Credit is key and has not unclogged yet
• Volatility and deleveraging will continue

• Positions
• Short risk assets, cover on government
  intervention
• Long short-term bonds
• End Results
• Very difficult month where our views were right
  but we were not able to benefit from them.
  Extreme volatility has reduced the size of
  positions by a factor of 6
• 0.3 for the month, 24.21 year-to-date

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October Thoughts

• Size of positions matter, do not pile on risk
  when volatility rises (October 2)
• Framing affects even well-warned individuals
  (October 6)
• Frequency matters but severity matters more
  (October 9)
• The perception of invincibility can give rise to
  the realization of stupidity (October 10)
• Risk reward is much easier to analyze with simple
  bets and binary results (October 14)
• Events that transform societies are generally
  swift and large (October 16)
• In a dynamic environment, changes occur much
  faster than we can imagine (October 23)

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Matrix of Expected ReturnNovember 2008

• Views
• Recession is a certainty
• Recovery is uncertain
• Governments are taking over the banking system

• Positions
• Short risk assets
• Long bonds
• End Results
• Very active month with trading in and out of
  position and position size very small
• 1 estimate for the month, 25 year to date

19
November Thoughts

• Dont be a big swinging dick (November 25)
• Do not overestimate your edge (November 26)
• The law of small samples, it never happened, it
  will never happen, just does not work (November
  28)

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Matrix of Expected ReturnDecember 2008

• Views
• Recession is a certainty
• Stimulus of massive proportion not working yet
• Trust in the government is key, quantitative
  easing needs to be monitored

• Positions
• Short risk assets
• Long bonds
• Look to short USD on quant easing

21
Keys to Future (Confidence in Government)
22
Keys to Future (Confidence in Government)
23
Keys to Future (Consumer Behaviour)
24
Keys to Future (Jobs)
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Conclusion

• Humility
• Ability to change your mind
• No bias
• Survival