How to build an alpha engine
It’s hard enough to deliver outperformance with one fund, but the more you run the more likely it becomes that one of the stable will drag down your performance figures. So for a fund manager running multiple funds, earning a Citywire rating takes on an extra layer of difficulty.
For Raimondo Marcialis and Gianmarco Stanga to earn a rating across five different funds of funds, as they did in 2008, is a notable achievement. In recent months they have slipped down the table, but the MC Gestioni fund selectors believe their tried and tested model will continue to deliver.
As the CIO of the Milan-based firm, Marcialis has become a well-known figure in the Italian finance sector, often appearing in the national media. A broad-based knowledge of financial markets needs to be a key part of his investment armoury: the funds of funds the pair run at MC Gestioni span many asset classes, regions and sectors.
While Marcialis is the man who is regularly quoted on macro-economic themes, he and Stanga bring different skill-sets to the partnership. Marcialis has a wealth of expertise in quantitative analysis and portfolio management, financial software skills, and all the background knowledge he has gained through his academic work. He lectures at a range of institutions and also has leading roles in several trade organisations. Stanga, meanwhile, has a strong research background and a degree in physics.
Marcialis is the brains behind the analytical tools that are used to build the portfolios. He created the investment process 12 years ago to analyse the fund universe and identify uncorrelated sources of alpha.
The proprietary system will generate a selection according to parameters covering performance, risk and style, all of which can be adjusted by the management team depending on their specific requirements.
‘We are confident this engine will create very strong portfolios,’ he says. ‘The first step is to know the manager, to know not just the numbers but the quality of the performance.
‘We want style consistency. The aim is to have many styles of manager because we think the most important goal is diversification, but not the ordinary concept of diversification. Our goal is to find funds which are complementary. We are interested in the mixture, we are interested in the portfolio allocation.
‘We don’t believe there is such a thing as the best fund. If we choose a fund, it’s not because we like that individual fund, it’s because it gives better trade-off between outperformance and the tracking error. We can take very, very active bets, while controlling the risk.’
‘We will build the best selection for the objectives. So we can build a number of portfolios, then select the most robust,’ says Marcialis.
With a fund of funds range that covers so many asset classes and regions, the duo also have to think about the bigger picture.
‘At the moment we are focused on the emerging markets and the Asian emerging markets in particular,’ says Marcialis. ‘We like Asia because there is a good level of diversification in that area.
‘A particular focus is the relationship between the US and Asian economies, and the level of growth in return on equity. Asia gives good diversification in both country and sector position.’
So has the turmoil of the past 18 months changed the way they assess fund managers?
‘We had some bad surprises last year and we made some wrong choices but even the best fund managers have made mistakes in the past,’ says Marcialis. ‘So now we do extra specific analysis of drawdown, and of volatility versus the benchmark. We also look at the size of the fund – but the quality of the size, in other words the concentration of investors. And we use only fund managers who have a very transparent process.’
Their biggest surprise of the crisis was the way in which investment dried up globally.
‘There was no escape. Liquidity was disappearing completely all at once,’ says Marcialis. ‘The leverage level in the banks was another surprise. It was greater than our expectations.
‘Now, for markets and for multimanagers, performance is not everything – safety is most important.’
Over the next 18 months, Marcialis anticipates further bad news, though he thinks the crisis is stabilising.
‘All types of companies must increase productivity and maintain investment in the expansion of the markets. We see low CPI, but lower PPI. The most important feature is to control unemployment. It is one of the most important indicators. We think the past level of growth in global consumer demand is not sustainable. We mostly look at markets that now grow at a lower speed.’
In their home market of Italy, meanwhile, the MC Gestioni managers see major change on the way. ‘In Italy we don’t have a culture of investment,’ says Marcialis. ‘Italians don’t know the rules of investment. In particular, they tend to invest at the top and they don’t have the right perception of the time horizon in which to invest. They prefer safe solutions.’
‘I think that in five or 10 years we will see great change. There will be new players in the market – for example financial consultants. At the moment, all the business is in the hands of the banks.’
‘This crisis can be the new opportunity for Italian asset managers. Our nation is poor, but our families are very rich. We have very high savings. I am sure the fund managers who have a correct and transparent process, and in particular the operators who can transform financial products, such as fund of funds managers, can have good results.’
Despite the changes Marcialis sees on the horizon, some things will remain constant.
‘We go wrong when we don’t use the right methodology,’ he says. ‘Quantitative methodology is like a car: it may be a Ferrari, but it’s most important to have Schumacher to drive it. And maths can help the money manager, but the money manager must put the input into the mathematical engine. We like to have not just one engine, but a multi-strategy approach.
‘In the future we will have a bipolar world, where the focus is on safe investments with a very low return or on risky investments with high potential return.’