asset management program università bicocca

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 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).


ORGANISATION

Risk Management

ASSET ALLOCATION

DIVISION

MUTUAL FUNDS

Forecasting and Strategy

Macro Analysis

Optimisation

Equity

Quantitative analysis

Bond


Step 1: Identify investor’s characteristics and goalsStep 1: Identify investor’s characteristics and goals


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


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


Relative returns in financial markets are predictableRelative returns in financial markets are predictable

Step 2: forecast risk and return


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?


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


Factors Commonly Used in Forecasting Absolute and Relative Market Factors Commonly Used in Forecasting Absolute and Relative Market ReturnsReturns


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)


GrowthGrowth



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



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


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


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


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


Market Return + Market Return + Currency ReturnCurrency Return


Equity Investment

Equity Portfolio Expected ReturnEquity Portfolio Expected Return

Extra-return vs Extra-return vs benchmarkbenchmark

BETABETA ++ ALFAALFA

Market ReturnMarket Return


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


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


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


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.


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


US INDICATORS

Earnigs Revisions


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



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.


Top Down Approach


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


Bottom up approach: Stock Selection


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


Portfolio optimisation maximises risk- adjusted expected return



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



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


Active PhaseActive PhaseTwo Sources of Alfa GenerationTwo Sources of 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)


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


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%


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


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

asset management program università bicocca

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