Asset Management Program Asset Management Program Università Bicocca Università Bicocca May 2007 May 2007
Asset Management ProgramAsset Management Program
Università BicoccaUniversità Bicocca May 2007May 2007
ProgramsPrograms
Equity InvestmentEquity Investment
Fideuram Investimenti SGRFideuram Investimenti SGR 11
Investment Process Investment Process
Asset AllocationAsset Allocation
Alternative investmentAlternative investment
Multymanager / open architectureMultymanager / open architecture
Quantitative Techniques and Risk Quantitative Techniques and Risk ManagementManagement
Investment Process / Asset Investment Process / Asset AllocationAllocation
Fideuram Investimenti SGRFideuram Investimenti SGR 22
Fideuram Investimenti SGR
Fideuram Investimenti is Banca Fideuram’s Asset Management Firm, responsible for all the company’s investment issues
Assets Under Management stand at around 50 bln Euro: 4th largest Asset Management Company in Italy
Fideuram Investimenti SGR employs 100 people, entirely involved in the asset management process: consultancy, asset allocation, fund management
Products: different kinds of SICAV, Mutual Funds, Pension Funds, Hedge Funds, Multimanager
Clients: private and institutional (Foundations, Pensions Funds, Banks).
Fideuram Investimenti SGRFideuram Investimenti SGR 33
ORGANISATION
Risk Management
ASSET ALLOCATION
DIVISION
MUTUAL FUNDS
Forecasting and Strategy
Macro Analysis
Optimisation
Equity
Quantitative analysis
Bond
Fideuram Investimenti SGRFideuram Investimenti SGR 44
Step 1: Identify investor’s characteristics and goalsStep 1: Identify investor’s characteristics and goals
Fideuram Investimenti SGRFideuram Investimenti SGR 55
Investment Process
Step 2: Forecast risk and return for each asset class Step 2: Forecast risk and return for each asset class
Step 3: Construct Optimal PortfolioStep 3: Construct Optimal Portfolio
Step 4: Choose the financial tool for each asset classStep 4: Choose the financial tool for each asset class
Step 5: Execute TradesStep 5: Execute Trades
Step 1: investor’ s Step 1: investor’ s characteristicscharacteristics and goals and goals
Fideuram Investimenti SGRFideuram Investimenti SGR 66
Define:
Time Horizon
Risk Tolerance
Set of asset classes (equity, bond, cash, corporate, high yield, hedge fund, private equity)
Approach
Responsibility : Private Banker
benchmark driven (relative return)
risk driven (total return)
Asset AllocationAsset Allocation
Benchmark DrivenBenchmark Driven: : investors choose a benchmark investors choose a benchmark according to is risk profile, asset managers takes tactical according to is risk profile, asset managers takes tactical exposure to maximise expected returnsexposure to maximise expected returns
Total Return: Total Return: flexible approach. Asset managers try flexible approach. Asset managers try to maximise expected return given a certain level of to maximise expected return given a certain level of risk (VAR)risk (VAR)
Asset Allocation vs benchmark
ASSET ALLOCATION OUTPUT
Exposure vs benchmark in terms of:
Asset Class
Country
Currency
Duration
GPF Progress 5 anni Benchmark
Fideuram Investimenti SGRFideuram Investimenti SGR 77
Relative returns in financial markets are predictableRelative returns in financial markets are predictable
Step 2: forecast risk and return
Fideuram Investimenti SGRFideuram Investimenti SGR 88
Responsibility : Asset Allocator, Economist, Strategist
Economic intuition and qualitative judgment Economic intuition and qualitative judgment must be must be supported by empirical evidencesupported by empirical evidence (econometric model, (econometric model, quantitative analysis)quantitative analysis)
Use investment themes that consistently drive returnsUse investment themes that consistently drive returns across global markets and asset classes (long-term across global markets and asset classes (long-term valuation, short-term momentum, fund flows, risk valuation, short-term momentum, fund flows, risk premium, macroeconomic policy)premium, macroeconomic policy)
How do we forecast How do we forecast expected returns?expected returns?
Fideuram Investimenti SGRFideuram Investimenti SGR 99
Forecasting Forecasting ThemeTheme Rationale Rationale
Identify a set of factors, which can be Identify a set of factors, which can be grouped into broad investment themesgrouped into broad investment themes
Fund Flows
Momentum
Risk Premium
Valuation
Macroeconomic Trade – off growth inflationTrade – off growth inflation
Distance between price and fundamentalsDistance between price and fundamentals
Liquidity goes into some asset classes more than othersLiquidity goes into some asset classes more than others
Rapidly appreciating assets often continue to appreciateRapidly appreciating assets often continue to appreciate
Excess Return to invest in the marketExcess Return to invest in the market
Step 2: forecast risk and return
Factors Commonly Used in Forecasting Absolute and Relative Market Factors Commonly Used in Forecasting Absolute and Relative Market ReturnsReturns
Step 2: forecast risk and return
VariableAsset Class
Equity
Bond Policy
Corporate
Currency
Multiple (PE, PB, PCF)
Price Momentum, Earnings Revisions
Corporate cash flow (Buy Backs, Issuance)
Liquidity (M1, M2, Monetary Policy)
Yield Curve
Output Gap
Inflation
Spread over Treasury
Balance Sheet Ratio
Interest Rate Differential
Futures on Interest Rate (Eurodollar, Euribor)
Fideuram Investimenti SGRFideuram Investimenti SGR 1010
GrowthGrowth
Step 2: forecast risk and return
Fideuram Investimenti SGRFideuram Investimenti SGR 1111
Compare your expectations with market expectationsCompare your expectations with market expectations
InflationInflation
Interest RateInterest Rate
VolatilityVolatility
SentimentSentiment
DCF Implied Earnings DCF Implied Earnings GrowthGrowth
Break Even Inflation (TIPS, O.A.T)Break Even Inflation (TIPS, O.A.T)
Strip of Futures on Interest Rate (Eurodollar, Euribor)Strip of Futures on Interest Rate (Eurodollar, Euribor)
Implied Volatility on Option (VIX)Implied Volatility on Option (VIX)
Risk Premium Risk Premium
Fideuram Investimenti SGRFideuram Investimenti SGR 1212
Step 2: forecast risk and return
FUTURES: implied interest rates
4.50
4.60
4.70
4.80
4.90
5.00
5.10
5.20
5.30
5.40
5.50
2.50
2.70
2.90
3.10
3.30
3.50
3.70
Eurodollar (Dec-06)- LEFT Euribor (Dec-06)-RIGHT
Step 3: Optimal PortfolioStep 3: Optimal Portfolio
Fideuram Investimenti SGRFideuram Investimenti SGR 1313
Must have a framework to move Must have a framework to move from predictability to from predictability to portfolio constructionportfolio construction
It requires a It requires a solid asset allocation toolsolid asset allocation tool (Mean Variance, (Mean Variance, Black-Litterman) and Black-Litterman) and systematic approach to risk systematic approach to risk managementmanagement
Maximise the Maximise the trade-off between expected gain and trade-off between expected gain and volatilityvolatility of tracking error, given the client’s tolerance for of tracking error, given the client’s tolerance for riskrisk
Responsibility: Quantitative Research TeamResponsibility: Quantitative Research Team
Portfolio Expected ReturnPortfolio Expected Return = asset class return + alfa = asset class return + alfa generation – costs (management fees and trading costs)generation – costs (management fees and trading costs)
Step 4: Investment ToolsStep 4: Investment Tools
Fideuram Investimenti SGRFideuram Investimenti SGR 1414
Identify Optimal Identify Optimal trade off between costs and alfa trade off between costs and alfa generation generation
Investment Tools: Mutual Fund, ETF, Derivatives, Hedge Investment Tools: Mutual Fund, ETF, Derivatives, Hedge Fund.Fund.
The more efficient a market is, the less worthwile it is to pay The more efficient a market is, the less worthwile it is to pay costs for alfa generationcosts for alfa generation (Active Funds). (Active Funds).
Concentrate costs where Alfa generation is highConcentrate costs where Alfa generation is high..
Step 5: Execute TradeStep 5: Execute Trade
Fideuram Investimenti SGRFideuram Investimenti SGR 1515
Implement incremental portfolio that reflects current Implement incremental portfolio that reflects current views and alpha strategyviews and alpha strategy
Careful attention to transaction costs, market liquidity, Careful attention to transaction costs, market liquidity, risk constraints and client guidelines.risk constraints and client guidelines.
Responsibility: Fund Manager, TraderResponsibility: Fund Manager, Trader
Equity InvestmentEquity Investment
Factors driving equity markets returns
Equity markets performance of the last 3 years. What’ s next?
Alfa Generation: TOP Down vs Bottom Up Approach
Quantitative techniques for equity investments
Fundamental analysis and equity valuation
Fideuram Investimenti SGRFideuram Investimenti SGR 1616
Market Return + Market Return + Currency ReturnCurrency Return
Fideuram Investimenti SGRFideuram Investimenti SGR 1717
Equity Investment
Equity Portfolio Expected ReturnEquity Portfolio Expected Return
Extra-return vs Extra-return vs benchmarkbenchmark
BETABETA ++ ALFAALFA
Market ReturnMarket Return
Fideuram Investimenti SGRFideuram Investimenti SGR 1818
Beta: Market Return
+ Dividend (or Earnings) growth+ Dividend (or Earnings) growth
Current Dividend YieldCurrent Dividend Yield
LiquidityLiquidity
+ Change in Multiples (PE, PB, etc)+ Change in Multiples (PE, PB, etc)
Factors changing MultiplesFactors changing Multiples
Earnings CycleEarnings CycleSentimentSentiment
ValuationMarkets look cheap compared to history, fundamentals or other asset class
Metrics: Price MomentumTool: technical analysis
LiquidityLiquidity available for financial investments
Earnings cycleDynamic of earnings growth
Fideuram Investimenti SGRFideuram Investimenti SGR 1919
Beta: factors driving market returns
Metrics: Economic Growth, inflation, Yield CurveTool: Macroeconomics analysis
MacroMarkets with best trade off growth / inflation
Metrics: Multiple (PE, PB, DY), Fair Value (DDM, DCF), Relative (B/E Yield)Tool: Fundamental analysis, quantitative metrics
Metrics: EPS Growth, margins, salesTool: Fundamental analysis, quantitative metrics
Metrics: Monetary policy, yield curve, M1 / M2, currency reserves, excess liquidity, corporate cash flow.Tool: Research, Balance Sheet Analysis
MomentumMarkets and currencies have strongrecent outperformance
Fideuram Investimenti SGRFideuram Investimenti SGR 2020
2002 – 2005: what was behind the equity market rally?
LiquidityLiquidity
ValuationValuation
All the factors were supportive from the equity market perspectiveAll the factors were supportive from the equity market perspective
Earnings cycleEarnings cycle
MomentumMomentum
Global Profits at record level. Restructuring and margins expansions. Best markets not best economy (Europe vs. USA and China)
StrongStrong
Equity market cheap after 2000 – 2002 collapse Equity market cheap after 2000 – 2002 collapse on multiples and relative to bondson multiples and relative to bonds
Central banks loosening monetary policy after Central banks loosening monetary policy after market collapse and September 11th. Zero market collapse and September 11th. Zero real interest rate, excess global liquidity. real interest rate, excess global liquidity.
Global Growth (3.5% real growth), without Global Growth (3.5% real growth), without inflation (2% CPI Core). inflation (2% CPI Core).
Macro Macro EnvironmentEnvironment
Fideuram Investimenti SGRFideuram Investimenti SGR 2121
LiquidityLiquidity
ValuationValuation
Some factors are changing from the equity market perspectiveSome factors are changing from the equity market perspective
Earnings cycleEarnings cycle
MomentumMomentum
Still robust, but the best is over. Margins and EPS growth decelerating. Earnings revision still positive.
StrongStrong
Still reasonable. Multiples in neutral area, equity still Still reasonable. Multiples in neutral area, equity still attractive vs. bond. Equity market up no more than attractive vs. bond. Equity market up no more than earnings (non multiple expansions)earnings (non multiple expansions)
Changed. Major banks in mood to tighten up (US, Changed. Major banks in mood to tighten up (US, Europe, Japan). Excess liquidity shrinking.Europe, Japan). Excess liquidity shrinking.
Still supportive. Strong growth in 2006 – 2007, reasonable Still supportive. Strong growth in 2006 – 2007, reasonable inflation expectations. Risk: US budget and trade inflation expectations. Risk: US budget and trade deficit, dollar collapse, Brent spike.deficit, dollar collapse, Brent spike.
2006: what’s next?
Macro Macro EnvironmentEnvironment
2002 – 20052002 – 2005 NOWNOW
MacroMacro ++++ ++++
ValuationValuation ++++++ ==
Earnings CycleEarnings Cycle ++++++ ==
LiquidityLiquidity ++++++ = / -= / -
Sentiment / MomentumSentiment / Momentum ++++ ++++++
ConclusionConclusion: equity market still reasonable, but the best is over. Trends : equity market still reasonable, but the best is over. Trends up, no major upside. Consolidation phase with more volatility.up, no major upside. Consolidation phase with more volatility.
Fideuram Investimenti SGRFideuram Investimenti SGR 2222
Equity markets’ perspective
Liquidity
-4
-3
-2
-1
0
1
2
3
4
3338
8
3375
4
3411
9
3448
4
3484
9
3521
5
3558
0
3594
5
3631
0
3667
6
3704
1
3740
6
3777
1
3813
7
3850
2
Market Valuation
-3
-2
-1
0
1
2
3
Updated 03/31/06
Fideuram Investimenti SGRFideuram Investimenti SGR 2323
US INDICATORS
Earnigs Revisions
Fideuram Investimenti SGRFideuram Investimenti SGR 2424
Msci The World Index
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
95 96 97 98 99 00 01 02 03 04 05 06
-0.35
-0.25
-0.15
-0.05
0.05
0.15
0.25
0.35
0.45
Price (L) Up_Dow n_Total_30days FY1 (R)
Msci USA next twelve months expected vs actual growth
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
20
03
Q1
20
03
Q2
20
03
Q3
20
03
Q4
20
04
Q1
20
04
Q2
20
04
Q3
20
04
Q4
20
05
Q1
20
05
Q2
20
05
Q3
20
05
Q4
20
06
Q1
20
06
Q2
20
06
Q3
20
06
Q4
Expected
Actual
Msci USA
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2003 2004 2005 2006
Expected
Actual
Earnings Growth
Fideuram Investimenti SGRFideuram Investimenti SGR 2525
Fideuram Investimenti SGRFideuram Investimenti SGR 2626
Equity portfolio: alfa generation
HOW CAN A FUND MANAGER BEAT THE MARKET?HOW CAN A FUND MANAGER BEAT THE MARKET?
Equity marketsEquity markets
Usa, Europe, Asia, Japan, Italy. Emerging MarketsUsa, Europe, Asia, Japan, Italy. Emerging Markets
BenchmarkBenchmark
SP500, Eurostoxx, Topix, Han Seng, MSCI.SP500, Eurostoxx, Topix, Han Seng, MSCI.
Fund Manager’s Fund Manager’s IssueIssue
Beat the benchmark.Beat the benchmark.
Fideuram Investimenti SGRFideuram Investimenti SGR 2727
Top Down Approach
Equity portfolio: alfa generation
Market Exposure beta exposure – futuresbeta exposure – futures
Currency exposureCurrency exposure hedging - Forwardhedging - Forward
Sector AllocationSector Allocation Energy vs FinancialsEnergy vs Financials
Style AllocationStyle Allocation Value vs growthValue vs growth
Size AllocationSize Allocation Blue Chips vs Small CapBlue Chips vs Small Cap
Factor AllocationFactor Allocation sensitivity to macro data (inflation, interest rates, industrial production, etc)
How has the marketresponded to the company’schanging fortunes?Metrics:Short-term reversals, Medium-term continuations, Long-term reversals
What is companymanagement strategy andbehaviour?Metrics:Net external financing, Change in sharesOutstanding, Company visits
What are the company’sprofit margins? Howefficient are its operations?Metrics:Earnings-to-sales ratio, Sales-to-total-assets ratio, EBIT-to-enterprise value, Forecast earnings-to-price
Are analysts upgrading ordowngrading their view ofthis company?Metrics:Earnings forecast revisions, Recommendation changes
Were earnings derived fromsustainable sources?Metrics:Accruals-to-total-assets, Change in net operatingassets
Fideuram Investimenti SGRFideuram Investimenti SGR 2828
Bottom up approach: Stock Selection
Equity portfolio: alfa generation
Are market prices coherent with firm’s fundamentals?Metrics:Price / Earnings, DDM, DCF, Price to Book, ROE break down.
Valuation Earnings Quality Profitability
Momentum Sentiment Management
Country and currency Country and currency exposureexposure
Transaction costTransaction cost
estimatesestimates
Optimal portfolio Optimal portfolio
Sector exposureSector exposure
Style exposureStyle exposurePortfolio
Optimisation
Size exposureSize exposureActive betsActive bets
Fideuram Investimenti SGRFideuram Investimenti SGR 2929
Portfolio optimisation maximises risk- adjusted expected return
Equity portfolio: alfa generation
Fideuram Investimenti SGRFideuram Investimenti SGR 3030
Our approach: philosophy and aims
Extra-return vs Bcmk 200 / 300 bp per year
Disciplined Approach
Rule for portfolio construction and rigorous risk management, Absolute (VaR) and Relative to bcmk (RVaR, Tracking Error)
Minimising Costs Lower trading costs mean higher portfolio returns
Two Phase
Defensive Phase (optimisation)
Immunisation vs a diversified set of risk factors (market, currency, sector, style, size exposure)
Active Phase
Bottom up approach. Two Sources of alfa generation: quantitative model and fundamental analysis
Defensive PhaseDefensive Phase
Fideuram Investimenti SGRFideuram Investimenti SGR 3131
Equity portfolio: alfa generation
Evidence shows that Evidence shows that performance vs. benchmark is driven performance vs. benchmark is driven more by bets you are not consciousmore by bets you are not conscious ofof (factor risk exposure, (factor risk exposure, stock you don’t own) than active bets you are aware of. stock you don’t own) than active bets you are aware of.
To maximise expected gains with respect to benchmark and To maximise expected gains with respect to benchmark and subject to a constraint of tracking error, subject to a constraint of tracking error, it is important to it is important to isolate sources of alfa generation.isolate sources of alfa generation.
Optimisation ProcessOptimisation Process
High number of stocksHigh number of stocks (80% market coverage) (80% market coverage)
Market and currency neutralMarket and currency neutral (beta 1) (beta 1)
Sector NeutralSector Neutral
Monitoring ofMonitoring of Style and Size Bias Style and Size Bias
• Multifactor model, covering over 600 stocks
• Transparency (no black box)
• Testing of different sets of variables (fundamental, technical, valuation) for each sector
• Basket of stocks sector neutral
• Backtest over 12 years
Source 2Source 1
Fideuram Investimenti SGRFideuram Investimenti SGR 3232
Active PhaseActive PhaseTwo Sources of Alfa GenerationTwo Sources of Alfa Generation
Equity portfolio: alfa generation
Quantitative Model Fundamental Analysis
• Analyst / Fund Managers for most sectors
• Proprietary valuation model (DCF + Break up ROE)
• Qualitative study of the company (sector analysis, company visits, management presentations)
Fideuram Investimenti SGRFideuram Investimenti SGR 3333
Investment Process
Three BlocksThree Blocks
1.1. Portfolio Low Tracking ErrorPortfolio Low Tracking Error
2.2. Quantitative Basket (80 – 100 stocks)Quantitative Basket (80 – 100 stocks)
3.3. Fundamental Basket (proprietary valuation model)Fundamental Basket (proprietary valuation model)
NO exposure to Market, Currency, Sector, Style
Alfa concentrated in Stock Picking
Product responsibility = Risk AllocatorProduct responsibility = Risk Allocator
Quantitative AnalystsQuantitative Analysts
Fund Managers /Sector AnalystFund Managers /Sector Analyst
Team
SectorsSectors
Selected Variables Selected Variables
Ranking of Stocks in Each Ranking of Stocks in Each SectorSector
Sector ConstructionSector Construction
Portfolio ConstructionPortfolio Construction
Utilities Banks Energy
Cash Flow P/E Price to Book STM Dividend Yield
EV/EBITDA
1. GDF
2. E.On
3. Enel
4. …
1. UBS
2. BPM
3. Santander
4. …
1. BP
2. ENI
3. Repsol
4. …
GDF, E.On, EnelUBS, BPM, Santander
BP, ENI
SSM
Market
Fideuram Investimenti SGRFideuram Investimenti SGR 3434
Construction of Quantitative Model
Spread Long vs Bench
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Jan-
97
Apr
-97
Jul-9
7
Oct
-97
Jan-
98
Apr
-98
Jul-9
8
Oct
-98
Jan-
99
Apr
-99
Jul-9
9
Oct
-99
Jan-
00
Apr
-00
Jul-0
0
Oct
-00
Jan-
01
Apr
-01
Jul-0
1
Oct
-01
Jan-
02
Apr
-02
Jul-0
2
Oct
-02
Jan-
03
Apr
-03
Jul-0
3
Oct
-03
Jan-
04
Apr
-04
Jul-0
4
Oct
-04
Jan-
05
Apr
-05
Jul-0
5
Oct
-05
Jan-
06
• Back test : January 97
•Universe: MSCI Europe
• Performance with dividends: Total Return
Information RatioInformation Ratio 1.811.81
Hit RatioHit Ratio 72.2%72.2%
Max DrawdownMax Drawdown -7.49%-7.49%
Annualized ReturnAnnualized Return 13,10%13,10%
Fideuram Investimenti SGRFideuram Investimenti SGR 3535
Results: Europe
• Back test : January 98
•Universe: MSCI USA
• Performance with dividends: Total Return
Information RatioInformation Ratio 1.36 1.36
Hit RatioHit Ratio 65.6%65.6%
Max DrawdownMax Drawdown -6.34%-6.34%
Annualized ReturnAnnualized Return 9,30%9,30%
Spread Long vs Bench
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Jan-
98
Apr
-98
Jul-9
8
Oct
-98
Jan-
99
Apr
-99
Jul-9
9
Oct
-99
Jan-
00
Apr
-00
Jul-0
0
Oct
-00
Jan-
01
Apr
-01
Jul-0
1
Oct
-01
Jan-
02
Apr
-02
Jul-0
2
Oct
-02
Jan-
03
Apr
-03
Jul-0
3
Oct
-03
Jan-
04
Apr
-04
Jul-0
4
Oct
-04
Jan-
05
Apr
-05
Jul-0
5
Oct
-05
Fideuram Investimenti SGRFideuram Investimenti SGR 3636
Results. USA
REFERENCESREFERENCES
Strategic Asset allocation: Portfolio choice for Long Strategic Asset allocation: Portfolio choice for Long Term InvestorsTerm Investors, Oxford University Press, 2002., Oxford University Press, 2002.
The Term Structure of the Risk – Return Trade OffThe Term Structure of the Risk – Return Trade Off . . Financial Analysts Journal, January / February 2005Financial Analysts Journal, January / February 2005
Investment ValuationInvestment Valuation – Damodaran – Wiley Finance - – Damodaran – Wiley Finance - 20042004
Winning the Loser’s GameWinning the Loser’s Game – Charles D. Ellis - 2004 – Charles D. Ellis - 2004