Think different to Be different

• Hey, François? It’s John. I’m calling you from my hotel in New York. My cellphone doesn’t work.
• Hello, John, s … ugar! We still on for tomorrow? You land at CDG tomorrow morning around 9 a.m., yeah? I’m thinking of leaving Amiens around 10.
• Copy that, François. See you tomorrow, bye for now, gotta dash.

So, as John had hung up without realising that he’d forgotten to specify the time and place of their meeting, how will our two friends get to see each other???

This year, we celebrate the second anniversary of the passing of Thomas Schelling, who won the Nobel prize Economics in 1995 for his game-theory research into conflicts and cooperation. The conversation above is inspired by one of his studies, which highlighted agents’ ability to coordinate (their “coordination capacity”) around a specific focal point. We are referring, in fact, to “Schelling’s concept of salience”. By this yardstick, our friends will, in all probability, bump into each other around midday at the Eiffel Tower, each of them having been assailed by the same doubts: where will he think I’m going? And when does he think I’ll get there?" 12 noon" and "Eiffel Tower" are two salient points in terms of time and place.

Schelling’s input also extended to the economics of convention, i.e., to the study of relationships and coordinations between economic agents. Financial markets, as places where investors meet to do deals, can be seen as a super-lab for this branch of the economy.

They come as they are: with ideas, perceptions and emotions in tow, and their decisions to sell or buy assets because they have constraints and, above all, convictions. Indeed, each investor clings to their conviction: for some, this means an analysis of economic fundamentals, for others an analysis of stock market prices, while for the younger generation it means back tests and, for the older, intuition. They, too, will be highly influenced by focal points. Why? Because focal points are useful when we’re lost and because we are often plagued by doubt. As the analytical framework is unstable, the effectiveness of each approach/conviction will necessarily be limited in time whereas focal points will prove more stable: 1.15 for the EUR/USD and 3% for 10Y US yields, for example, for 2019.

Our investment approach comprises a combination of the different approaches mentioned above. We develop models, we back-test and integrate a mixture of fundamental and technical analysis. However, prior to investing, we systematically try to imagine just what could go wrong. We don’t study the variables but rather model residue, i.e., the residue of the hidden variables, those that will most influence asset price movements.

Another way of describing what we do is to mention behavioural finance, which, simply put, is an understanding of the behaviours that guide investors’ investment decisions. Consequently, our Global Macro management approach aims to capture the inefficiencies generated by excessive behaviours. Obviously, this type of finance is less formal than traditional academic finance, which is based on expected optimised returns. Although this kind of finance is more implicit than explicit, it lets us look at things from a different angle. We consequently get closer to real financial market rationality, that of all those men and women buying and selling assets, rather than the form of rationality that economists would like agents to adopt.

This investment process, when applied to equity index, bond index and currency universes, allows us to deliver a different and decorrelated performance, irrespective of the environment. It’s also one that we enhance on an ongoing basis, as we believe – yes, folks, we too have our convictions! – in a certain Darwinist approach to financial markets. You have to adapt to financial market evolutions. As JM Keynes so succinctly put it (and we leave the last word(s) with him):