Asset Management Program Università Bicocca


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Asset Management Program Università Bicocca

  1. 1. Asset Management Program Università Bicocca May 2007
  2. 2. Programs <ul><li>Equity Investment </li></ul>Fideuram Investimenti SGR 1 <ul><li>Investment Process </li></ul><ul><li>Asset Allocation </li></ul><ul><li>Alternative investment </li></ul><ul><li>Multymanager / open architecture </li></ul><ul><li>Quantitative Techniques and Risk Management </li></ul>
  3. 3. Investment Process / Asset Allocation Fideuram Investimenti SGR 2
  4. 4. Fideuram Investimenti SGR <ul><li>Fideuram Investimenti is Banca Fideuram’s Asset Management Firm , responsible for all the company’s investment issues </li></ul><ul><li>Assets Under Management stand at around 50 bln Euro : 4th largest Asset Management Company in Italy </li></ul><ul><li>Fideuram Investimenti SGR employs 100 people, entirely involved in the asset management process : consultancy, asset allocation, fund management </li></ul><ul><li>Products: different kinds of SICAV, Mutual Funds, Pension Funds, Hedge Funds, Multimanager </li></ul><ul><li>Clients: private and institutional (Foundations, Pensions Funds, Banks). </li></ul>Fideuram Investimenti SGR 3
  5. 5. ORGANISATION Risk Management ASSET ALLOCATION DIVISION MUTUAL FUNDS Forecasting and Strategy Macro Analysis Optimisation Equity Quantitative analysis Bond Fideuram Investimenti SGR 4
  6. 6. <ul><li>Step 1: Identify investor’s characteristics and goals </li></ul>Fideuram Investimenti SGR 5 Investment Process 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
  7. 7. Step 1: investor’ s characteristics and goals Fideuram Investimenti SGR 6 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)
  8. 8. Asset Allocation <ul><li>Benchmark Driven : investors choose a benchmark according to is risk profile, asset managers takes tactical exposure to maximise expected returns </li></ul><ul><li>Total Return: flexible approach. Asset managers try to maximise expected return given a certain level of risk (VAR) </li></ul>
  9. 9. Asset Allocation vs benchmark ASSET ALLOCATION OUTPUT Exposure vs benchmark in terms of : <ul><li>Asset Class </li></ul><ul><li>Country </li></ul><ul><li>Currency </li></ul><ul><li>Duration </li></ul>Fideuram Investimenti SGR 7 GPF Progress 5 anni Benchmark
  10. 10. <ul><li>Relative returns in financial markets are predictable </li></ul>Step 2: forecast risk and return Fideuram Investimenti SGR 8 Responsibility : Asset Allocator, Economist, Strategist <ul><li>Economic intuition and qualitative judgment must be supported by empirical evidence (econometric model, quantitative analysis) </li></ul><ul><li>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) </li></ul>
  11. 11. <ul><li>How do we forecast expected returns? </li></ul>Fideuram Investimenti SGR 9 Forecasting Theme Rationale Identify a set of factors, which can be grouped into broad investment themes Fund Flows Momentum Risk Premium Valuation Macroeconomic Trade – off growth inflation Distance between price and fundamentals Liquidity goes into some asset classes more than others Rapidly appreciating assets often continue to appreciate Excess Return to invest in the market Step 2: forecast risk and return
  12. 12. Factors Commonly Used in Forecasting Absolute and Relative Market Returns Step 2: forecast risk and return Variable Asset 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 SGR 10
  13. 13. <ul><li>Growth </li></ul>Compare your expectations with market expectations Step 2: forecast risk and return Fideuram Investimenti SGR 11 Inflation Interest Rate Volatility Sentiment DCF Implied Earnings Growth Break Even Inflation (TIPS, O.A.T) Strip of Futures on Interest Rate (Eurodollar, Euribor) Implied Volatility on Option (VIX) Risk Premium
  14. 14. Fideuram Investimenti SGR 12 Step 2: forecast risk and return
  15. 15. Step 3: Optimal Portfolio Fideuram Investimenti SGR 13 <ul><li>Must have a framework to move from predictability to portfolio construction </li></ul><ul><li>It requires a solid asset allocation tool (Mean Variance, Black-Litterman) and systematic approach to risk management </li></ul><ul><li>Maximise the trade-off between expected gain and volatility of tracking error, given the client’s tolerance for risk </li></ul>Responsibility: Quantitative Research Team
  16. 16. <ul><li>Portfolio Expected Return = asset class return + alfa generation – costs (management fees and trading costs) </li></ul>Step 4: Investment Tools Fideuram Investimenti SGR 14 <ul><li>Identify Optimal trade off between costs and alfa generation </li></ul><ul><li>Investment Tools: Mutual Fund, ETF, Derivatives, Hedge Fund. </li></ul><ul><li>The more efficient a market is, the less worthwile it is to pay costs for alfa generation (Active Funds). </li></ul><ul><li>Concentrate costs where Alfa generation is high . </li></ul>
  17. 17. Step 5: Execute Trade Fideuram Investimenti SGR 15 <ul><li>Implement incremental portfolio that reflects current views and alpha strategy </li></ul><ul><li>Careful attention to transaction costs, market liquidity, risk constraints and client guidelines. </li></ul>Responsibility: Fund Manager, Trader
  18. 18. Equity Investment <ul><li>Factors driving equity markets returns </li></ul><ul><li>Equity markets performance of the last 3 years. What’ s next? </li></ul><ul><li>Alfa Generation: TOP Down vs Bottom Up Approach </li></ul><ul><li>Quantitative techniques for equity investments </li></ul><ul><li>Fundamental analysis and equity valuation </li></ul>Fideuram Investimenti SGR 16
  19. 19. <ul><li>Market Return + Currency Return </li></ul>Fideuram Investimenti SGR 17 Equity Investment Equity Portfolio Expected Return Extra-return vs benchmark BETA + ALFA
  20. 20. <ul><li>Market Return </li></ul>Fideuram Investimenti SGR 18 Beta: Market Return + Dividend (or Earnings) growth Current Dividend Yield Liquidity + Change in Multiples (PE, PB, etc) Factors changing Multiples Earnings Cycle Sentiment
  21. 21. Valuation Markets look cheap compared to history, fundamentals or other asset class Metrics: Price Momentum Tool : technical analysis Liquidity Liquidity available for financial investments Earnings cycle Dynamic of earnings growth Fideuram Investimenti SGR 19 Beta: factors driving market returns Metrics: Economic Growth, inflation, Yield Curve Tool : Macroeconomics analysis Macro Markets 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, sales Tool : Fundamental analysis, quantitative metrics Metrics: Monetary policy, yield curve, M1 / M2, currency reserves, excess liquidity, corporate cash flow. Tool : Research, Balance Sheet Analysis Momentum Markets and currencies have strong recent outperformance
  22. 22. Fideuram Investimenti SGR 20 2002 – 2005: what was behind the equity market rally? Liquidity Valuation All the factors were supportive from the equity market perspective Earnings cycle Momentum Global Profits at record level. Restructuring and margins expansions. Best markets not best economy (Europe vs. USA and China) Strong Equity market cheap after 2000 – 2002 collapse on multiples and relative to bonds Central banks loosening monetary policy after market collapse and September 11th. Zero real interest rate, excess global liquidity. Global Growth (3.5% real growth), without inflation (2% CPI Core). Macro Environment
  23. 23. Fideuram Investimenti SGR 21 Liquidity Valuation Some factors are changing from the equity market perspective Earnings cycle Momentum Still robust, but the best is over. Margins and EPS growth decelerating. Earnings revision still positive. Strong Still reasonable. Multiples in neutral area, equity still attractive vs. bond. Equity market up no more than earnings (non multiple expansions) Changed. Major banks in mood to tighten up (US, Europe, Japan). Excess liquidity shrinking. Still supportive. Strong growth in 2006 – 2007, reasonable inflation expectations. Risk: US budget and trade deficit, dollar collapse, Brent spike. 2006: what’s next? Macro Environment
  24. 24. <ul><li>2002 – 2005 NOW </li></ul><ul><li>Macro ++ ++ </li></ul><ul><li>Valuation +++ = </li></ul><ul><li>Earnings Cycle +++ = </li></ul><ul><li>Liquidity +++ = / - </li></ul><ul><li>Sentiment / Momentum ++ +++ </li></ul><ul><li>Conclusion : equity market still reasonable, but the best is over. Trends up, no major upside. Consolidation phase with more volatility. </li></ul>Fideuram Investimenti SGR 22 Equity markets’ perspective
  25. 25. Updated 03/31/06 Fideuram Investimenti SGR 23 US INDICATORS
  26. 26. Earnigs Revisions Fideuram Investimenti SGR 24
  27. 27. Earnings Growth Fideuram Investimenti SGR 25
  28. 28. Fideuram Investimenti SGR 26 Equity portfolio: alfa generation HOW CAN A FUND MANAGER BEAT THE MARKET? Equity markets Usa, Europe, Asia, Japan, Italy. Emerging Markets Benchmark SP500, Eurostoxx, Topix, Han Seng, MSCI. Fund Manager’s Issue Beat the benchmark.
  29. 29. Fideuram Investimenti SGR 27 Top Down Approach Equity portfolio: alfa generation 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)
  30. 30. How has the market responded to the company’s changing fortunes? Metrics: Short-term reversals, Medium-term continuations, Long-term reversals What is company management strategy and behaviour? Metrics: Net external financing, Change in shares Outstanding, Company visits What are the company’s profit margins? How efficient are its operations? Metrics: Earnings-to-sales ratio, Sales-to-total-assets ratio, EBIT-to-enterprise value, Forecast earnings-to-price Are analysts upgrading or downgrading their view of this company? Metrics: Earnings forecast revisions, Recommendation changes Were earnings derived from sustainable sources? Metrics: Accruals-to-total-assets, Change in net operating assets Fideuram Investimenti SGR 28 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
  31. 31. <ul><li>Country and currency exposure </li></ul>Transaction cost estimates Optimal portfolio Sector exposure Style exposure Portfolio Optimisation Size exposure Active bets Fideuram Investimenti SGR 29 Portfolio optimisation maximises risk- adjusted expected return Equity portfolio: alfa generation
  32. 32. Fideuram Investimenti SGR 30 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
  33. 33. Defensive Phase Fideuram Investimenti SGR 31 Equity portfolio: alfa generation 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
  34. 34. <ul><li>Multifactor model, covering over 600 stocks </li></ul><ul><li>Transparency (no black box) </li></ul><ul><li>Testing of different sets of variables (fundamental, technical, valuation) for each sector </li></ul><ul><li>Basket of stocks sector neutral </li></ul><ul><li>Backtest over 12 years </li></ul>Source 2 Source 1 Fideuram Investimenti SGR 32 Active Phase Two Sources of Alfa Generation Equity portfolio: alfa generation Quantitative Model Fundamental Analysis <ul><li>Analyst / Fund Managers for most sectors </li></ul><ul><li>Proprietary valuation model (DCF + Break up ROE) </li></ul><ul><li>Qualitative study of the company (sector analysis, company visits, management presentations) </li></ul>
  35. 35. Fideuram Investimenti SGR 33 Investment Process Three Blocks <ul><li>Portfolio Low Tracking Error </li></ul><ul><li>Quantitative Basket (80 – 100 stocks) </li></ul><ul><li>Fundamental Basket (proprietary valuation model) </li></ul>NO exposure to Market, Currency, Sector, Style Alfa concentrated in Stock Picking Product responsibility = Risk Allocator Quantitative Analysts Fund Managers /Sector Analyst Team
  36. 36. <ul><li>Sectors </li></ul><ul><li>Selected Variables </li></ul><ul><li>Ranking of Stocks in Each Sector </li></ul><ul><li>Sector Construction </li></ul><ul><li>Portfolio Construction </li></ul>Utilities Banks Energy Cash Flow P/E Price to Book STM Dividend Yield EV/EBITDA <ul><li>GDF </li></ul><ul><li>E.On </li></ul><ul><li>Enel </li></ul><ul><li>… </li></ul><ul><li>UBS </li></ul><ul><li>BPM </li></ul><ul><li>Santander </li></ul><ul><li>… </li></ul><ul><li>BP </li></ul><ul><li>ENI </li></ul><ul><li>Repsol </li></ul><ul><li>… </li></ul>GDF, E.On, Enel UBS, BPM, Santander BP, ENI SSM Market Fideuram Investimenti SGR 34 Construction of Quantitative Model
  37. 37. <ul><li>Back test : January 97 </li></ul><ul><li>Universe: MSCI Europe </li></ul><ul><li>Performance with dividends: Total Return </li></ul>Fideuram Investimenti SGR 35 Results: Europe 13,10% Annualized Return -7.49% Max Drawdown 72.2% Hit Ratio 1.81 Information Ratio
  38. 38. <ul><li>Back test : January 98 </li></ul><ul><li>Universe: MSCI USA </li></ul><ul><li>Performance with dividends: Total Return </li></ul>Fideuram Investimenti SGR 36 Results. USA 9,30% Annualized Return -6.34% Max Drawdown 65.6% Hit Ratio 1.36 Information Ratio
  39. 39. REFERENCES <ul><li>Strategic Asset allocation: Portfolio choice for Long Term Investors , Oxford University Press, 2002. </li></ul><ul><li>The Term Structure of the Risk – Return Trade Off . Financial Analysts Journal, January / February 2005 </li></ul><ul><li>Investment Valuation – Damodaran – Wiley Finance - 2004 </li></ul><ul><li>Winning the Loser’s Game – Charles D. Ellis - 2004 </li></ul>