Asset Asset Management Program Management Program
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Asset Asset Management Program Management Program Presentation Transcript

  • 1. Asset Management Program Università Bicocca April 2006
  • 2. Programs Investment Process / Asset Allocation Macroeconomics Equity Investment Bond Investment Alternative Investment Quantitative Techniques and Risk Management Fideuram Investimenti SGR 1
  • 3. Investment Process / Asset Allocation Fideuram Investimenti SGR 2
  • 4. Fideuram Investimenti SGR Fideuram Investimenti is Banca Fideuram’s Asset Management Firm, responsible for all the company’s investment issues Fideuram Investimenti SGR employs 100 people, entirely involved in the asset management process: consultancy, asset allocation, fund management Assets Under Management stand at around 50 bln Euro: 4th largest Asset Management Company in Italy Products: different kinds of SICAV, Mutual Funds, Pension Funds, Hedge Funds, Multimanager Clients: private and institutional (Foundations, Pensions Funds, Banks). Fideuram Investimenti SGR 3
  • 5. ORGANISATION ASSET ALLOCATION MUTUAL FUNDS DIVISION Macro Quantitative Analysis analysis Forecasting and Equity Strategy Optimisation Bond Risk Management Fideuram Investimenti SGR 4
  • 6. Investment Process Step 1: Identify investor’s characteristics and goals Step 2: Forecast risk and return for each asset class Step 3: Construct Optimal Portfolio Step 4: Choose the financial tool for each asset class Step 5: Execute Trades Fideuram Investimenti SGR 5
  • 7. Step 1: investor’ s characteristics and goals Define: Time Horizon Risk Tolerance Approach benchmark driven (relative return) risk driven (total return) Set of asset classes (equity, bond, cash, corporate, high yield, hedge fund, private equity) Responsibility : Private Banker Fideuram Investimenti SGR 6
  • 8. Strategic and Tactical Asset Allocation ASSET ALLOCATION OUTPUT Exposure vs benchmark in terms of: GPF Progress 5 anni Benchmark Asset Class Country Currency Duration Fideuram Investimenti SGR
  • 9. Step 2: forecast risk and return Relative returns in financial markets are predictable Economic intuition and qualitative judgment must be supported by empirical evidence (econometric model, quantitative analysis) Use investment themes that consistently drive returns across global markets and asset classes (long-term valuation, short-term momentum, fund flows, risk premium, macroeconomic policy) Responsibility : Asset Allocator, Economist, Strategist Fideuram Investimenti SGR 8
  • 10. Step 2: forecast risk and return How do we forecast Identify a set of factors, which can be expected returns? grouped into broad investment themes Forecasting Theme Rationale Macroeconomic Trade – off growth inflation Valuation Distance between price and fundamentals Fund Flows Liquidity goes into some asset classes more than others Momentum Rapidly appreciating assets often continue to appreciate Risk Premium Excess Return to invest in the market Fideuram Investimenti SGR 9
  • 11. Step 2: forecast risk and return Factors Commonly Used in Forecasting Absolute and Relative Market Returns Asset Class Variable Equity Multiple (PE, PB, PCF) Price Momentum, Earnings Revisions Corporate cash flow (Buy Backs, Issuance) Liquidity (M1, M2, Monetary Policy) Yield Curve Bond Policy Output Gap Inflation Spread over Treasury Corporate Balance Sheet Ratio Interest Rate Differential Currency Futures on Interest Rate (Eurodollar, Euribor) Fideuram Investimenti SGR 10
  • 12. Step 2: forecast risk and return Compare your expectations with market expectations Growth DCF Implied Earnings Growth Inflation Break Even Inflation (TIPS, O.A.T) Interest Rate Strip of Futures on Interest Rate (Eurodollar, Euribor) Volatility Implied Volatility on Option (VIX) Sentiment Risk Premium Fideuram Investimenti SGR 11
  • 13. Step 2: forecast risk and return FUTURES: implied interest rates Eurodollar (Dec-06)- LEFT Euribor (Dec-06)-RIGHT 5.50 3.70 5.40 3.50 5.30 5.20 3.30 5.10 5.00 3.10 4.90 2.90 4.80 4.70 2.70 4.60 4.50 2.50 06 06 06 06 6 6 6 6 6 6 6 6 6 6 6 6 /A 00 00 00 00 00 00 00 00 00 00 00 00 #N 20 20 20 20 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 6/ 3/ 3/ 7/ 13 20 27 10 17 24 10 17 24 31 17 24 1/ 2/ 3/ 4/ 1/ 1/ 1/ 2/ 2/ 2/ 3/ 3/ 3/ 3/ 4/ 4/ Fideuram Investimenti SGR 12
  • 14. Step 3: Optimal Portfolio Must have a framework to move from predictability to portfolio construction It requires a solid asset allocation tool (Mean Variance, Black-Litterman) and systematic approach to risk management Maximise the trade-off between expected gain and volatility of tracking error, given the client’s tolerance for risk Responsibility: Quantitative Research Team Fideuram Investimenti SGR 13
  • 15. Step 4: Investment Tools Portfolio Expected Return = asset class return + alfa generation – costs (management fees and trading costs) Identify Optimal trade off between costs and alfa generation The more efficient a market is, the less worthwile it is to pay costs for alfa generation (Active Funds). Concentrate costs where Alfa generation is high. Investment Tools: Mutual Fund, ETF, Derivatives, Hedge Fund. Fideuram Investimenti SGR 14
  • 16. Step 5: Execute Trade Implement incremental portfolio that reflects current views and alpha strategy Careful attention to transaction costs, market liquidity, risk constraints and client guidelines. Responsibility: Fund Manager, Trader Fideuram Investimenti SGR
  • 17. Equity 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 SGR
  • 18. Equity Investment Equity Portfolio Expected Return BETA + ALFA Market Return + Extra-return vs Currency Return benchmark Fideuram Investimenti SGR 17
  • 19. Beta: Market Return Current Dividend Yield Market Return + Dividend (or Earnings) growth + Change in Multiples (PE, PB, etc) Factors changing Multiples Liquidity Sentiment Earnings Cycle Fideuram Investimenti SGR 18
  • 20. Beta: factors driving market returns Macro Metrics: Economic Growth, inflation, Markets with best trade off growth / Yield Curve inflation Tool: Macroeconomics analysis Valuation Metrics: Multiple (PE, PB, DY), Fair Markets look cheap compared to Value (DDM, DCF), Relative (B/E Yield) history, fundamentals or other Tool: Fundamental analysis, quantitative asset class metrics Metrics: EPS Growth, margins, sales Earnings cycle Tool: Fundamental analysis, quantitative Dynamic of earnings growth metrics Liquidity Metrics: Monetary policy, yield curve, M1 Liquidity available for financial / M2, currency reserves, excess liquidity, investments corporate cash flow. Tool: Research, Balance Sheet Analysis Momentum Markets and currencies have strong Metrics: Price Momentum recent outperformance Tool: technical analysis Fideuram Investimenti SGR 19
  • 21. 2002 – 2005: what was behind the equity market rally? Macro Global Growth (3.5% real growth), without Environment inflation (2% CPI Core). Central banks loosening monetary policy after Liquidity market collapse and September 11th. Zero real interest rate, excess global liquidity. Valuation Equity market cheap after 2000 – 2002 collapse on multiples and relative to bonds Momentum Strong Global Profits at record level. Restructuring and Earnings cycle margins expansions. Best markets not best economy (Europe vs. USA and China) All the factors were supportive from the equity market perspective Fideuram Investimenti SGR 20
  • 22. 2006: what’s next? Macro Still supportive. Strong growth in 2006 – 2007, reasonable inflation expectations. Risk: US budget and trade Environment deficit, dollar collapse, Brent spike. Changed. Major banks in mood to tighten up (US, Liquidity Europe, Japan). Excess liquidity shrinking. Still reasonable. Multiples in neutral area, equity still Valuation attractive vs. bond. Equity market up no more than earnings (non multiple expansions) Momentum Strong Still robust, but the best is over. Margins and EPS growth Earnings cycle decelerating. Earnings revision still positive. Some factors are changing from the equity market perspective Fideuram Investimenti SGR 21
  • 23. Equity markets’ perspective 2002 – 2005 NOW Macro ++ ++ Valuation +++ = Earnings Cycle +++ = Liquidity +++ =/- Sentiment / Momentum ++ +++ Conclusion: equity market still reasonable, but the best is over. Trends up, no major upside. Consolidation phase with more volatility. Fideuram Investimenti SGR 22
  • 24. 33 -4 -3 -2 -1 0 1 2 3 4 38 8 33 75 4 34 11 9 34 Liquidity Updated 03/31/06 48 4 34 84 9 35 21 5 35 58 0 35 94 5 36 31 0 36 67 6 Fideuram Investimenti SGR 37 04 1 37 34 40 -3 -2 -1 0 1 2 3 6 US INDICATORS 33 3 37 77 1 34 69 8 38 13 7 35 06 38 3 50 2 35 42 9 35 79 4 Market Valuation 36 15 9 36 52 4 36 89 0 37 25 5 37 62 0 37 98 5 38 35 1 38 23 71 6
  • 25. Earnigs Revisions Msci The World Index 1,500 0.45 1,400 0.35 1,300 0.25 1,200 0.15 1,100 0.05 1,000 -0.05 900 -0.15 800 -0.25 700 -0.35 95 96 97 98 99 00 01 02 03 04 05 06 Price (L) Up_Dow n_Total_30days FY1 (R) Fideuram Investimenti SGR 24
  • 26. Earnings Growth Msci USA next twelve months expected vs actual growth 25.00% 20.00% 15.00% Expected Actual 10.00% 5.00% 0.00% 03 1 03 2 03 3 03 4 04 1 04 2 04 3 04 4 05 1 05 2 05 3 05 4 06 1 06 2 06 3 06 4 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q Msci USA 25.00% 20.00% 15.00% Expected Actual 10.00% 5.00% 0.00% 2003 2004 2005 2006 Fideuram Investimenti SGR 25
  • 27. Equity portfolio: alfa generation Equity markets Usa, Europe, Asia, Japan, Italy. Emerging Markets Benchmark SP500, Eurostoxx, Topix, Han Seng, MSCI. Fund Manager’s Issue Beat the benchmark. HOW CAN A FUND MANAGER BEAT THE MARKET? Fideuram Investimenti SGR 26
  • 28. Equity portfolio: alfa generation Top Down Approach Market Exposure beta exposure – futures Currency exposure hedging - Forward Sector Allocation Energy vs Financials Style Allocation Value vs growth Size Allocation Blue Chips vs Small Cap Factor Allocation sensitivity to macro data (inflation, interest rates, industrial production, etc) Fideuram Investimenti SGR 27
  • 29. Equity portfolio: alfa generation Bottom up approach: Stock Selection Valuation Earnings Quality Profitability Are market prices coherent Were earnings derived from What are the company’s with firm’s fundamentals? sustainable sources? profit margins? How Metrics: Metrics: efficient are its operations? Price / Earnings, DDM, DCF, Accruals-to-total-assets, Metrics: Price to Book, ROE break Change in net operating Earnings-to-sales ratio, Sales-to- down. assets total-assets ratio, EBIT-to- enterprise value, Forecast earnings-to-price Momentum Sentiment Management How has the market Are analysts upgrading or What is company responded to the company’s downgrading their view of management strategy and changing fortunes? this company? behaviour? Metrics: Metrics: Metrics: Short-term reversals, Medium- Earnings forecast revisions, Net external financing, term continuations, Long-term Recommendation changes Change in shares reversals Outstanding, Company visits Fideuram Investimenti SGR 28
  • 30. Equity portfolio: alfa generation Portfolio optimisation maximises risk- adjusted expected return Country and currency exposure Sector exposure Transaction cost Style exposure Portfolio estimates Optimisation Active bets Size exposure Optimal portfolio Fideuram Investimenti SGR 29
  • 31. Our approach: philosophy and aims Extra-return vs Bcmk 200 / 300 bp per year Disciplined Rule for portfolio construction and rigorous Approach 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) Active Phase Immunisation vs a diversified set Bottom up approach. Two of risk factors (market, currency, Sources of alfa generation: sector, style, size exposure) quantitative model and fundamental analysis Fideuram Investimenti SGR 30
  • 32. Equity portfolio: alfa generation Defensive Phase Evidence shows that performance vs. benchmark is driven more by bets you are not conscious of (factor risk exposure, stock you don’t own) than active bets you are aware of. To maximise expected gains with respect to benchmark and subject to a constraint of tracking error, it is important to isolate sources of alfa generation. Optimisation Process High number of stocks (80% market coverage) Market and currency neutral (beta 1) Sector Neutral Monitoring of Style and Size Bias Fideuram Investimenti SGR 31
  • 33. Equity portfolio: alfa generation Active Phase Two Sources of Alfa Generation Source 1 Source 2 Quantitative Model Fundamental Analysis • Multifactor model, covering over 600 • Analyst / Fund Managers for most stocks sectors • Transparency (no black box) • Proprietary valuation model (DCF + Break up ROE) • Testing of different sets of variables (fundamental, technical, valuation) for • Qualitative study of the company each sector (sector analysis, company visits, management presentations) • Basket of stocks sector neutral • Backtest over 12 years Fideuram Investimenti SGR 32
  • 34. Investment Process Three Blocks 1. Portfolio Low Tracking Error 2. Quantitative Basket (80 – 100 stocks) 3. Fundamental Basket (proprietary valuation model) NO exposure to Market, Currency, Sector, Style Alfa concentrated in Stock Picking Product responsibility = Risk Allocator Team Quantitative Analysts Fund Managers /Sector Analyst Fideuram Investimenti SGR 33
  • 35. Construction of Quantitative Model Sectors Market Selected Variables Ranking of Stocks in Each Utilities Banks Energy Sector Cash Flow P/E Price to Book STM Dividend EV/EBITD Sector Construction Yield 1. GDF 1. UBS 1. BP Portfolio Construction 2. E.On 2. BPM 2. ENI 3. Enel 3. Santander 3. Repsol 4. … 4. … 4. … UBS, BPM, GDF, E.On, Enel BP, ENI Santander SSM Fideuram Investimenti SGR 34
  • 36. Results: Europe Spread Long vs Bench 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Apr-97 Oct-97 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 • Back test : January 97 Information Ratio 1.81 •Universe: MSCI Europe Hit Ratio 72.2% • Performance with dividends: Total Return Max Drawdown -7.49% Annualized Return 13,10% Fideuram Investimenti SGR 35
  • 37. Results. USA Spread Long vs Bench 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 • Back test : January 98 Information Ratio 1.36 •Universe: MSCI USA Hit Ratio 65.6% • Performance with dividends: Total Return Max Drawdown -6.34% Annualized Return 9,30% Fideuram Investimenti SGR 36
  • 38. REFERENCES Strategic Asset allocation: Portfolio choice for Long Term Investors, Oxford University Press, 2002. The Term Structure of the Risk – Return Trade Off. Financial Analysts Journal, January / February 2005 Investment Valuation – Damodaran – Wiley Finance - 2004 Winning the Loser’s Game – Charles D. Ellis - 2004