Milan Forum: Shifting to alternatives
Nigh-on 60 delegates heard about European long/short, strategic equities, commodities, European ABS, absolute return and multi-strategy funds at this year’s Milan Alternative Ucits Forum.
Against the backdrop of investors shifting from bonds to alternatives in an ongoing low-yield environment, InvestmentEurope’s Milan Alternative Ucits Forum 2017, held at the Four Seasons hotel on 9 March, outlined multiple investment approaches.
At the Forum, Aviva’s Juozas Barauskas presented the case for a multi-strategy approach to generate targeted returns in a world where many security valuations are stretched and the volatility regime is shifting.
Presenting a new approach to the traditional portfolio combining equities, fixed income to offset risks and alternatives for “spicy investments”, Barauskas said the multistrategy approach looks for market, opportunistic and risk-reducing strategies to deliver a specific level of return.
Barauskas said Aviva’s multi-strategy approach takes advantage of market mispricings and noted that central banks, despite distorting the markets and not improving the economic picture, are creating opportunities from a valuation point of view. The investment specialist said the strategy favoured short investments in digitally disrupted companies and going long on the dollar.
STRATEGIC APPROACH TO EQUITIES
Alessandro Paulillo and Rinaldo Leva presented Duemme’s strategic approach for equity investments, which is applied to the Esperia Funds Sicav, an open-ended, daily dealing, Ucits compliant equity long/short fund investing mainly in the Euro area.
During 2016, the fund gained 17% net against volatility of 8.5% for its Class I Euro share, while, over the same period, the benchmark Eurostoxx index gained 1.5% against more than 20% volatility, Paulillo and Leva explained.
“The fund meets the need for a product investing in equities with a fundamental and medium-long term perspective, avoiding the typical volatility of the equity markets and the stress that goes with it,” Paulillo said.
The fund aims at alpha generation through stock picking to build a portfolio of 30-35 undervalued companies, with good business models and management, invested with a medium-long term horizon.
The team also optimises the portfolio beta with flexible management of the net equity exposure from 0 to 50% through a mixture of bottom up and top down approach. Finally, the optimisation of the portfolio’s overall return is achieved with active liquidity management through investments in government and corporate bonds up to 20% of NAV, Paulillo explained.
Another Italian asset manager, Eurizon Capital, spoke at the Forum about investments in European asset-backed securities (ABS) through its Securitized Bond fund. Massimo Spadotto, fund manager and head of Structured Fixed Income, defined European ABS as a “potential island of happiness in the credit market”, benefitting from an “excellent” risk/return profile.
Since ABS are mainly floating rate bonds, the duration risk is limited, Spadotto noted, adding that the level of transparency has increased significantly thanks to loan-by-loan data. In addition, the securities offer a significant carry while providing asset diversification thanks to low correlation with other asset classes, he argued.
“The ABS performance is driven by macro features, they could take advantage from the general European recovery story,” Spadotto said, adding that there has been an alignment of interest with the originator retention of at least 5% since 2011.
George Cheveley, portfolio manager at Investec Asset Management, highlighted the area of commodity and resource company equities. He argued that although they performed strongly over the past year, they remained undervalued, with scope for further recovery.
Commodity fundamentals are supportive, due to improving demand driven by global growth, increased infrastructure spending and continued supply moderation sparked by recent production cuts, he said.
He noted a supportive macro outlook for base metals and bulk commodities, off the back of nominal GDP growth accelerating in China, as industrial profits rise, coupled with demand picking up in the developed world.
“Gold offers no yield and thus is increasingly attractive in an environment of low to negative real interest rates,” Cheveley added.
Cheveley pointed out that natural resource equities have historically outperformed their underlying commodities, while companies such as oil and gas company Royal Dutch Shell, mining company Rio Tinto or salmon producer Marine Harvest have a renewed focus on shareholder returns.
Valuations, therefore, remain attractive, Cheveley, who has run Investec’s GSF Global Natural Resources fund since its launch, concluded.
James Clunie, head of Strategy at Jupiter Asset Management, said the mandate he runs for the firm’s absolute return fund is global, multi-asset and long/short. This means he can invest in “anything, anywhere”, but he focuses on equity long/short.
“Almost all the time the fund has some equity long, some equity short and simple hedges, and the advantage of having a simple portfolio is that we as managers can understand the risks and communicate them clearly to our clients,” he said.
Clunie discussed the challenges of building a robust portfolio and explained how short-selling can help in this task. “There’s something that we do well and this is single stock short-selling. If you can see what short-sellers are doing in real time what you see is a dataset with information signals in it.
“For 14 years, I have done my research specialisation, and through datasets I have worked out what the signals are, how to extract them and how to use them,” he said. Over the three-and-a-half years Clunie has run this fund, it has delivered over 4% alpha annually on the short book alone, which has become the driver of the absolute return vehicle, he explained.
Fund manager James Inglis-Jones explained how he focuses exclusively on company cashflows when managing the Liontrust GF European Strategic Equity Fund, as he believes it is the single most important determinant of shareholder investment returns.
By using proprietary market cashflow indicators, Inglis-Jones, along with fund manager Samantha Gleave, identify long/short investment opportunities across Europe at any given time.
To illustrate this, Inglis-Jones gave the example of two European wind turbine manufacturers, Vestas Wind Systems and Nordex.
Although both companies have similar valuations, their prospects could not be more different, making Vestas a good company to buy and Nordex one to sell.
Vestas has been in the fund’s long book on the back of its strong cashflow, facilitating returns to shareholders; on the other hand, although Nordex has posted 27% growth in one year, cashflow is barely growing as it has been used for investments. In addition, the firm has issued debt and equity to fund its merger with Acciona.
As a result, Nordex makes “a good profile as a short candidate,” Inglis-Jones said.