Fighting volatility through multi-asset funds

Italy’s Südtirol Bank portfolio manager Nicola Tonelli (pictured), in charge of selecting funds for the bank’s funds, is looking at multi-asset strategies with the aim of reducing current risks related to asset volatility.

Historically low yields driven by central banks’ monetary policies coupled with political uncertainty on the back of the UK decision to leave the EU and the upcoming US presidential election have created the perfect storm to further increase volatility in global markets.

To cope with this challenging scenario, Tonelli is looking to increase exposure to funds across different asset classes in search of more consistent returns with lower volatility and other risks, a move that is in line with client demands, he says.

Absolute return funds are also in demand, Tonelli says, but “not so heavily” and mainly on-shore. On the other hand, hedge fund investments are preferred through regulated vehicles, he says.

DIRECTIONAL EXPOSURE

Südtirol’s fund clients have expressed an increasing appetite for multi-asset investments through qualitative strategies and solid investment processes as a source of decorrelation, which is pushing Tonelli to seek funds investing in such strategies.

“Anchoring a portion of the portfolio to this kind of strategies is useful to avoid shocks that can affect a single asset class, reaching a better risk-return profile and ‘playing’ these shocks in a tactical way using, for example, ETFs to have a directional exposure to certain indices,” Tonelli says.

“It’s a typical core-satellite approach that we think could be a good way to deal with the financial markets environment during the next months,” he adds.

Thus, funds with portfolios exposed to a broad set of factors across the main asset classes and without structural biases can help to exploit short-run market swings without taking too much risk, Tonelli says.

Based in Bolzano, Tonelli works with a team of three led by Südtirol’s head of investments Vittorio Godi. The team is responsible for selecting investment vehicles for the bank’s funds, with assets under management of about €1bn invested in actively managed funds and ETFs of equity indexes and commodities, bonds and single stocks.

Südtirol’s fund selection team tends to seek out funds on an ad hoc basis depending on the asset allocation decisions, combining an array of methods in the selection process.

The qualitative approach of the selection involves meetings with asset management firms and conference calls with portfolio managers to properly understand the factors behind the investment process, as well as contact to assess the manager’s skills and experience.

SELECTION PROCESS

After implementing an initial filter of a minimum €100m in AUM and two years of track-record, the selection process starts with a quantitative approach for each specific asset class, based on a series of evaluation criteria such as information ratio, performance persistence or maximum draw-down.

This allows the selection team to score each fund, after which it analyses the investment process of the “toprated” in a more qualitative way, to identify funds’ possible strengths and weaknesses.

For Tonelli, the key attributes in managers include proven track-record and consistency in investment process, offering full portfolio disclosure and management stability.

“We seek out capability to accurately identify the actual risk factors in the portfolio and to actively manage them,” he says.

A fund showing much more volatility than in the past would raise an automatic red flag, Tonelli says, as it would suggest an unexpected change in the investment process. Another warning signal would be prompted by strong divergence between the fund’s performance and its benchmark.

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