Asset Management Program

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Asset Management Program
Università Bicocca
May 2007
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Programs

• Investment Process

• Asset Allocation

• Equity Investment

• Alternative investment

• Multimanager / open architecture

• Quantitative Techniques and Risk Management

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Multimanager
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What is the multimanager approach

• 3 ways of multimanager
• Top down allocation decided by internal manager
• The generation of alpha is deputed to external
  managers (funds of funds)
• 2. Mixed structure
• 3. Mandate to an external company to manage a
  fund / managed account
• the top down process and the generation of alpha
  are totally deputed to an external manager

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Why the multimanager approach

• 3 main reasons
• Range and Quality
• through the multimanager is possible to acquire
  expertise on markets / approaches / styles not
  covered
• 2. Diversification
• approach and market diversification
• 3. Economic rationale
• trend of demand towards multimanager

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Universe of funds

• 2 ways to enter the funds universe
• Direct agreements
• Issues
• long time and costs to negotiate legal and
  commercial agreement
• few fund houses
• need of a trading platform
• 2. Comprehensive Platform (Allfunds Bank)

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Mapping the funds
Differences from an universe of stocks No
reliable information from data providers
(morningstar, sp) or official classification
(assogestioni) about market on which the fund
invests (no discriminaton from an area and a part
of that area) utilisation of systematic currency
hedging correlation to particular markets (real
estate) different styles etc.
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Mapping the funds

• Solutions
• Best way
• due diligence on all funds
• sophisticated quant analysis (multifactorial
  regression)
• Issues
• time and resources many resources and long time
  to cover all the universe
• multicollinearity
• 2. Light due diligence (creation of a DB with key
  information)
• single factor regression to validate qualitative
  data
• Attribution to the appropriate benchmark

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Time series

• Critical aspect
• Time series are available but not all in line
  with the market
• Time series shifted by one day
• easy solution
• 2. Pricing of the assets intraday
• correct the series by adding and subtracting the
  market performance

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Quantitative screening

• Type of fund
• Equity or fixed income fund
• regression with the attributed benchmark
• 2. Absolute return fund
• ability to reach the performance target within
  volatility and var limits

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Quantitative screening

• Goals
• Benchmark driven portfolio with short to mid term
  horizon, top down approach with tactical asset
  allocation
• Profile of indicators to look for
• we need funds with high predictability, close to
  ETF / index tracker, high Rsqare, consistence of
  Beta, better with outperformance but we can bear
  light underperformance
• Usually funds with these characteristics have
  quantitative investment process, low tev, little
  deviation from benchmark allocation, securities
  diversification, risk management process is a key

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Quantitative screening
Goals 2. Benchmark as a reference for the
portfolio, mid to long term horizon, no need to
beat the benchmark, but to have a better risk /
performance profile (usually private
portfolios) Profile of indicators to look
for lower Rsquare, no matter the inconsistence
of Beta, higher tev, profile of
outperformance Usually funds with these
characteristics have bottom up discretional
investment process, concentrated portfolios, some
deviation from benchmark allocation. They can
base the generation of outperformance both on
asset allocation, market timing and security
selection
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Quantitative screening
Goals 3. Portfolio with outperformance target vs
benchmark in a mid term horizon, costs to repay
(usually funds of funds) Profile of indicators
to look for some funds with mid to high Rsquare,
consistence of outperformance, mid tev to reduce
drawdown probability and limit the dimension of
the underperformance some funds identified for
the second portfolio to generate excess return
vs benchmark
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Quantitative screening
Goals 4. Portfolio with an absolute return
target Profile of indicators to look for good
risk / return profile, low / no correlation with
equity or bond market, little drawdown
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Qualitative analysis

• Many aspects to investigate
• The firm
• ownership, organisation, AUM
• 2. Investment philosophy process
• investment universe coherence with benchmark,
  market and style declared
• investment process
• initial screening, idea generation, valuation
  techniques is the process robust, is it coherent
  with the investment philosophy?
• changes in the process settle the quant
  analysis

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Qualitative analysis
buy sell discipline trade off flexibility -
risk? positions held for risk purposes
conviction? asset allocation is a
key? consequences on the portfolio
construction 3. The manager / management team
single star manager quick decisions, but what
if he lives? team internal conflicts but
continuity who is responsible for what?
motivation and remuneration are managers
motivated? are they evaluated on performances?
What is the time period for the evaluation one
calendar year consolidation of the
performance? rolling period
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Qualitative analysis
4. Characteristics of the portfolio
investment style, capitalisation, approach
asses coherence with what declared
past performance number of securities in
the portfolio utilisation of cash,
derivatives, currency hedging coherence with
the approach targets in terms of performance
and tev is there also tev and performance
budgeting? is the performance consistent with
this? how do they explain the past performance?
limits relative to the benchmark (beta,
countries sectors) coherence with the approach
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Portfolio construction
Goals Equity portfolios beat the Msci tr net
dividend index Absolute return portfolios reach
the declared target How Equity
portfolios diversification in terms of markets,
style, approach Uncorrelated alpha Risk control
(beta, tev, deviation from benchmark) Absolute
return portfolios Diversification in terms of
strategies / markets Uncorrelated
performances Risk control (volatility,
correlation and beta vs equity and bond market)
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