Alliance Bernstein’s Michele Patri on why past certainties are worth little today

A flexible fund management approach including agnosticism to benchmarks is crucial to handling markets in what will “probably be a fairly horrible economic environment over the next two years”, says Alliance Bernstein’s Michele Patri.

The manager of the group’s European Flexible Equity fund added classic long-only approaches will also struggle in volatile markets.

And not even hedge funds made money this year – they are down 4.4% by 31 October, according to Hedge Fund Research. Statistics from Morgan Stanley Research and Factset suggest in this year’s difficult markets hedge funds have stopped generating alpha for the first time since 1995.

“The perfect storm has come over the past few months, and my base case is the equity market will be very challenging,” said Patri (pitured).

“A portfolio manager needs tools to protect clients, and a long-only approach can expose clients to short term volatility. In the kind of environment we expect markets to have in 2012, such a manager will have an impossible job.”

He said funds would need the ability to take a flexible approach. “Instead of picking the best possible pharmaceutical or consumer stocks, for example, you have to be able to ask, do you actually want to be in pharma or consumer stocks at all?

“My benchmark is ‘not lose money’, and to make it when I can. But if the market are going to be horrible, you will have some protection built in, too.”

Patri’s European Flexible Equity fund, launched in February 2011, made 2.3% to 31 October this year, as mainstream assets apart from core G7 debt struggled to make money. Even hedge funds, which should be able to profit even if markets fall, are down 4.4%, according to Hedge Fund Research.

Patri’s fund drastically cut net long exposure to equities to at the height of the market volatility. Currently the net long position stands at 39%, and those companies it is exposed to are typically classic defensives such as pharmaceuticals, food retailers and telecoms, and physical gold via ETFs.

He avoids “any company with a lot of debt needing refinancing in 2012 because they are a risk. Before, you looked at debt to EBITDA, and how much the company could sustain EBITDA, but now it is different, because if you are a start-up company and you have to refinance a lot of debt, the question is, where will you find the money to do that?

“The problem with Europe’s sovereigns is their impact on banks, and that is potentially unlimited. You can be an entrepreneur with 30 employees and $5m of revenue, and realise they are not giving you loans. That is why I think the next year will be horrible, and in this situation the stock market is vulnerable.

“It is a new mindset dealing with a business in such an emergency and managing a company when such changes happen.”


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