efundresearch.com: What does TOBAM stand for and how would you define the firm’s overall investment philosophy?
Christophe Roehri: TOBAM stands for “Think Out of the Box” Asset Management. This way of thinking has led TOBAM, created in 2005, to become a pioneer in what the industry calls the “Smart Beta” or “Alternative Beta”.
TOBAM’s core investment philosophy is to maximize diversification in order to deliver the full risk premium of an asset class.
Our research indicates that the systematic returns available from equity markets are higher than previously estimated using market cap weighted benchmarks, and are also far more stable over time. In effect, market cap-weighted benchmarks carry heavy, costly, implicit bets which evolve dynamically. On the contrary, TOBAM’s Anti-Benchmark® approach is designed to access the full risk premium evenly from all the independent risk factors available in the investment universe.
efundresearch.com: TOBAM offers a broad set of Anti-Benchmark® strategies – what underlying methodology shall enhance the probability of outperforming the corresponding, market cap-weighted benchmarks?
Christophe Roehri: TOBAM’s patented Anti-Benchmark® approach is a systematic, long only and fully invested strategy which seeks to deliver the full risk premium of an asset class by maximizing diversification. If you believe markets are efficient, meaning the absence of easily accessible arbitrage opportunities, then the way to build an efficient portfolio is not to try to implement winning bets, but rather to collect the Risk Premium via diversification. Classical finance defines the Risk Premium as the return of the undiversifiable portfolio, for which the Anti-Benchmark® strategy is a good candidate to build the portfolio that maximizes diversification.
TOBAM’s proprietary measure of diversification is the Diversification Ratio® (DR), defined as the ratio of the weighted average of stock volatilities over the volatility of the overall portfolio. The DR is maximized to produce a portfolio designed to access risk premium evenly from all the independent risk factors available in the investment universe.
The Anti-Benchmark® process is designed to create portfolios which lie closer to the ex-post efficient frontier than the market cap portfolio over a market cycle. For example, in equity markets, it aims at enhancing performance vs. the market cap weighted benchmark by 3% to 5% per annum via greater diversification, while also reducing volatility by 20% to 30% p.a. over a full market cycle.