The concept of “Return Drivers” was developed by Mike Dever at Brandywine Asset Management in the early 1990s and introduced to the public by Mr. Dever in 2011 in his best-selling investment book, Jackass Investing: Don’t do it. Profit from it. As written in the book “a return driver is the primary underlying condition that drives the price of a market.” Rather than simply accepting, for example, that stocks provide an intrinsic return or are powered by some magical “risk premium,” return driver based investing requires a person to understand the true source of returns. (Mr. Dever does exactly this in the opening chapter of the book, showing clearly the two primary drivers of stock market returns).
Once return drivers are understood, they can serve as the basis for “Trading Strategies”. A trading strategy is developed by coupling a return driver with the markets that are best suited to capture the movement in price powered by that return driver.
The most revolutionary aspect of return driver based investing is that it completely replaces the “asset class” based investing that has been taught for so many years. It frees up investors to create truly diversified portfolios that incorporate uncorrelated trading strategies - subject to disparate event risks - rather than marginally diversified portfolios that are constrained by the use of increasingly correlated asset classes.
Return driver based investing was first used and proved highly successful in the trading of Brandywine Asset Management's Benchmark trading program, developed by Mr. Dever in the early 1990s. The program incorporated dozens of return driver based trading strategies together with an innovative portfolio allocation model that utilized Predictive Diversification, elements of which are today referred to by others as “risk parity” investing.