Fund Manager In Focus
Dreman Value Management While the “final version” of Dreman Value Management was incorporated in 1997, David Dreman had already founded predecessor companies going back to 1977. The company as it is today has $5.5 billion in assets under management coming from mutual funds, pension funds, foundations, endowment funds and high net-worth individuals. While Dreman does not sit at the top of the industry in terms of absolute returns over a long time scale, what he has achieved is not subjecting his investors to the same risks that many of those hedge funds at the top of the tree have incurred. When it comes to protecting against the downside, most funds are pretty poor as the singular most popular hedge fund strategy is based around trend following, but with leverage. Consequently, when the trend turns it typically creates a large drawdown for those funds as they only get out after quite a hit. A classic recent example of the difficulty of these types of funds is the woes experienced by the AHL Diversified fund at Man Group – range bound and choppy markets are impossible for them to navigate. In contrast, the investment strategy that Dreman follows seems to be a very sound one and that has been achieving consistent profits across many years.
It was during the 60s that Dreman faced what all money managers do early in their career – a devastating loss. Through simply following the crowd and using leverage he was hit with a tub thumping 75% loss on his own capital, something which, unsurprisingly, led him to redefine his strategies.
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He became, in the process, one of the founding fathers of the contrarian strategy: buying when everybody is selling and selling when everybody is buying. One of the principal inputs of his approach is based on P/E evaluation; buying low P/E stocks and selling the high P/E ones.
“When it comes to protecting the downside, most funds are pretty poor as the singular most popular hedge fund strategy is based around trend following, but with leverage. Consequently, when the trend turns it typically creates a large drawdown for those funds as they only get out after quite a hit.” While many academics and market participants would have you believe that financial markets are premised on the assumption that investors are rational and have unbiased expectations, Dreman believes the opposite and that additionally, human psychology plays a considerable role in equity price movements. The market often misjudges future prospects, with a tendency to over-react to events through buying what is already at high prices and selling what is out of favour. In a truly efficient market, even if some people make misjudgements in their investments, one would expect that the biggest and best resourced players would take this opportunity to make profits at their expense and so harmonise return peaks and troughs. In recent years in particular we can see that this most certainly has not been the case, with one bubble after another forming. Again, if markets were “efficient” then at the first sign of a bubble forming these educated investors would just short sell the market and drive it back to intrinsic value. But that doesn’t always happen.