SI408: Has Trend Following Changed Forever? ft. Alan Dunne

**SPEAKER_1** (0:01)
Welcome to Top Traders Unplugged. In markets, success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict.
In each episode, we go deep with some of the world's most thoughtful minds in investing, economics and beyond to understand how they think, how they prepare and how they decide, and the experiences that shaped how they see the world. No noise, no shortcuts, just real conversations to help you think better and invest with confidence.

**Niels Kaastrup-Larsen** (0:35)
Welcome or welcome back to this week's edition of the systematic investor series with Alan Dunne and I, Niels Kaastrup-Larsen, where each week we take the pulse of the global market through the lens of a rules-based investor. Alan, it is wonderful to be back with you. I know you just told me it is nice and warm in Dublin.
The summer has arrived, it seems.

**Alan Dunne** (0:57)
The summer has arrived, for sure, we are getting some good sunshine.
Not quite as bad as continental Europe, but it has definitely been warm the last couple of weeks. In my ALEC office here, it has definitely been hitting some records this week, 29 degrees or something like that. So a little bit cooler today, so hopefully I will be OK for the next year at least.

**Niels Kaastrup-Larsen** (1:20)
Exactly. I was just telling you that I sit in a basement where I do my recording, and that actually is quite nice in the summer. Not so nice in the winter, but it's really nice at this time of year. Anyways, we've got, as usual, solid lineup of topics, a couple of new papers actually. So and one of them in particular, I would say, is quite fascinating. And we're going to get into all of that. But before we do, I am very curious to hear what has hit your radar in the last few weeks.
Anything exciting?

**Alan Dunne** (1:55)
Well, at that time of year, everybody's heading off to the beach and looking for recommendations for summer reading. So I've been reading a couple of different books. But one that's been very interesting is the book about Jeremy Grantham, The Making of a Permabear, something like that. And it's written with Edward Chancellor, who's been on Top Traders Unplugged. So I think Edward Chancellor has written it, but he worked with Jeremy to write it.
So I'm probably a quarter of the way through it, but already a lot of interesting little anecdotes.
I mean, I've always read Jeremy Grantham's, his investment outlooks. And The Last Dance was a famous one he had there a few years ago. But I was reading it for about 10, 15 years.
But didn't really know that much about him and his background and how he managed the portfolio. I always assumed he was kind of a fundamental bottom up kind of a stock picker, you know, fundamental value. His letters were always kind of about fundamental valuation. He was always bearish. But a few things that I've learned, which were quite interesting from reading the book, is one, him and one of his earlier firms, not GMO, were early proponents of passive investing. So this is going back quite a long time. And there were also early pioneers of quant investing. So that was news to me. I didn't realize he's a quant, basically. Or he spent a lot of his time doing quant. And also that they had, they used momentum and trend type strategies as well. And quite good advocates for them in that they saw great complementarity between value and momentum. And they were kind of early pioneers in terms of quant investing.
And there's a couple of interesting anecdotes about their kind of quant experience. One, where they build an early kind of quant equity model based on a couple of fundamental factors for a client. The client was the IMF and didn't do very well. And then it kind of parked and came back to it, made a lot of improvements. And then it did very well and they were happy with it. And then over the course of the next 10 years, they spent 10 years tinkering with it, trying to enhance it. All brought in modifications, all that they felt were valid and made sense and they couldn't improve it. So it's just kind of an interesting anecdote from, obviously, this is the kind of challenge that we hear from managers all the time. You come up with enhancements, new ideas, but beyond a certain level, very often, it's difficult to kind of improve on a model. And another anecdote he had was they found this other factor called the neglect factor. So a stock was kind of neglected by the market, so it didn't have a lot of analyst coverage, was, I suppose, small cap without analyst coverage, something like that. They did research and found this was a very strong factor that they were going to combine with value and with momentum. And they had done the research and they implemented it. And as soon as they implemented it, it didn't work for six years or something, and then they had to park it. So again, another experience that you hear with quant managers of doing the research, it all makes sense, and then you put it on and it doesn't work. So it just shows you how timeless these experiences are of running quant and systematic strategies. He's talking about these experiences from the 1980s, 1990s, and we still encounter them today.