Essentia Case Studies

TGAM Case Study

Talisman Global Asset Management

In this interview, Julian Sinclair, Talisman CIO, talks about the importance of having a feedback loop in the portfolio management process and how he’s been using Essentia’s software to refine his investment skillset.

Talisman Global Asset Management is a London-based family office overseeing approximately $4.5 billion for the Pears family, with half of that managed in-house.

Hi Julian. You’ve been using Essentia Analytics since 2014. What prompted you to first try the software?

I’ve always found it useful to sit down and review my historic investment activity – it reveals patterns, trends or missed opportunities in the way I’m investing that might otherwise get missed. The issue for me – and I suspect for many fund managers – has been finding the time and focus to do it in a regular and structured way.

For example, before we started using Essentia, we had over 2.5 years of trade data available. I knew there was a lot of good information in that data but without the bandwidth to examine it properly, I found myself relying more on my own hunches about whether I was performing as well as I could be.

As a result, when I heard about Essentia and the possibility of automating this review process in an intelligent way, I was naturally eager to find out more and give it a go.

 

Did you have some immediate goals when you first started using the software?

Yes – I wanted to know what I was bad at and why, as much as what I was getting right. Reflecting on the mistakes you’ve made can be depressing sometimes but it’s ultimately very helpful and brings out patterns in investment behaviour that I’d rather know about and manage than be blind to.

 

Given the context you describe, it sounds like Essentia was fulfilling both an investment as well as a resources requirement for Talisman?

That’s correct. On the investment side, I have a team working for me who generate ideas and I have my own conversations and do my own research. But in reviewing the performance of the whole, I didn’t want to have to hire, build and manage a team of quants.

It was much simpler – and cost efficient – to get in a system that could help me structure my review process and provide the kind of data-driven insights that I want. Also, by using Essentia, I can leave it to them to source the best quant, behavioural and development talent.

 

What features of the software have been important to you so far?

I’ve got a lot of value from the Timeline function in Essentia. I use it to review my individual positions over time, annotated for transactions and any notes I’ve made.

I then meet my Essentia account manager (Marianne Brammer – who is an ex-fund manager herself) every 4-6 weeks to review and discuss the insights from the software. Setting time aside and going through the data with someone who totally understands the environment I’m working in is very valuable and really helps me think about and explore what works and what doesn’t. It’s not the kind of feedback I can get from chatting with people on the desk.

I then review my notes from those meetings and we’ve also set up some email notifications within Essentia’s software that are triggered by my trading activity.

 

Can you give us an example of the kind of investment insight you’ve gained from Essentia?

A good example relates to what I’ve learned about how I manage my short positions.

After my trade data was first loaded into Essentia, one of the things that was immediately evident from the analytics was that my high conviction, long equity bets were doing much better than my short positions.

As a result of this discovery, I haven’t stopped shorting but I’ve definitely become more diligent about not running them as long because I know now that this has historically caused losses which are avoidable. Those email notifications I mentioned will – in this context – prompt me to review my short positions and, as a result, I’m quicker to cover my short bets.

And, on the long side, I can obviously be more confident about my skill in trading and managing those positions, especially over the longer term.

 

Was this insight about shorting something you were aware of before?

Yes and no. As I said before, prior to using Essentia, I might have had a hunch of where I was strong or weak but I didn’t have a proper measure of the magnitudes or consistency.

Having the actual data show tendencies helps me to fine tune how I do things and focus on what I’m good at. It doesn’t make me want to change my overall style or approach to investing – nor would I expect it to. But it’s those refinements, those incremental gains – through doing more of the right thing, less of the wrong thing – that can be very important to performance over the medium to long term.

 

As well as giving insights into manager behaviour, Essentia also provides an investment journaling feature. Journaling is one of those simple things that many managers and traders agree can be a very effective tool for improving performance.

Yes, I’d agree with that. The ability to record an investment thesis over time – particularly when you can link those notes to market and portfolio information, as you can in Essentia – is a very valuable way to assess and reflect on the reasons that you did something.

It’s also important to keep an honest record somewhere of those little thoughts and ideas which can trigger a trade – could be I’m concerned about a macro event or I’m feeling nervous. These things – if not recorded – can easily be forgotten and yet they can, over time, have a meaningful impact on performance. In this sense, a journal affords an extra degree of control over what’s really going on in the life of a portfolio.

 

Can you give me an example of how you’ve used the journaling function within your investment process?

One example is a position we took in ProSieben, Germany’s largest TV broadcaster (ticker: PSM.Germany). Late 2014, we started looking at it when it came up in a screen as a company with a sizeable 3.5% dividend. At the time we thought that the Street was under-appreciating its digital division and its cash flow.

I started journaling my thoughts and capturing in Essentia news and comments from our analysts. A few months went by and my journal entries were becoming more bullish so in January 2015, we put the stock on Talisman’s high-conviction list and built the position. At one point it was our third largest holding in the long-short equity portfolio. It did very well.

Using the journaling function allowed me to track how my investment thesis was building – something that’s critical to developing conviction in a trade. There’s so much information that crosses one’s mind in any given day that having a place to store these ideas, observations and feelings – rather than trying to rely on memory – is very useful.

 

And how do you enter your notes into the journal? Are you someone who religiously enters your notes on a daily basis or is your approach more flexible?

I know people who complete their trade journal everyday. Personally, I would find that too much so we’ve set up my assistant so she can send my notes and meeting minutes directly into the system. This is a workaround but it works well for me and how I run my day.

Essentia’s Timeline feature lets you easily and accurately capture the ‘why’ behind each investment decision.

What else have you learned using Essentia?

Very interestingly, when going through the analytics, it has become clear that if I sit in front of the screens for too long there is a tendency for me to over-trade – and that can lead to me into taking smaller positions that are less likely to make money. It’s a behaviour I am working on changing by spending more time analysing and reading, and also a bit more time away from my desk.

 

Now that you have more of a structured feedback loop in place, what are your thoughts on how fund managers can self-improve?

The relationship I have with the Essentia team and their software has without doubt provided a very useful mirror in which to examine my own strengths and weaknesses as a portfolio manager. Through being able to understand my investment behaviour and skills with concrete data – not hunch or intuition – I’m in a much better position to allocate my time to where there are greater performance opportunities.

I won’t pretend that changing one’s investment habits and behaviour is easy – especially when you’ve been successful and have got used to trading or running your daily workflow in a particular way. But I’d be the first to acknowledge that it’s important to think about those habits and explore seriously how they impact performance. In this way, Essentia’s technology provides the opportunity – but you need the ambition to be a better fund manager if you want to get the most from it.

 

Julian, thanks for your time.

Julian Sinclair

“I wanted to know what I was bad at and why, as much as what I was getting right.”

Julian Sinclair CIO, Talisman

To see how Essentia’s feedback loop can be used to support your investment process, contact us on info@essentia-analytics.com or click here to arrange a quick demo.