Italian investors seeking out FX for liquid diversification

Foreign exchange could become a preferred asset for Italian investors seeking a liquid and diversified asset class, according to certain market participants.

In recent months, Italy’s technocratic government headed by prime minister Mario Monti has taken concrete steps to impose fiscal austerity measures and to pursue long-overdue economic reforms in the country.

But persistent political uncertainty in southern Europe is causing investors to be cautious.

According to Matteo Belleri, portfolio manager in the team responsible for fund selection for discretionary portfolios at Schroders Italy Private Banking, Italian investors are aware of the risks. But they are also ready to take advantage of opportunities that could rise in an uncertain environment. This could be a ‘core-satellite’ approach, which maintains the strategic allocation in a balanced profile adding a tactical allocation invested in a basket of currencies.

“In the past year, we have seen several asset managers launching funds investing in currencies of countries characterised by the best financial and economic fundamentals. In this way, we can diversify the currency exposure of managed profiles benefiting from currency appreciation of virtuous countries,” Belleri says.

As an example, in this area we can find the UBS Currency Diversifier, a fund focused on shortterm maturity sovereigns bonds of smaller, developed, higher-quality countries. The economic period is characterised by low interest rates, strong divergence in government bond yield and expectation of low-growth environment, mixed with political uncertainty, which is likely to increase the interest in more flexible profiles. “These profiles aim to generate absolute return in all market conditions, focusing on a certain risk budget level. The client will choose a maximum volatility level and ask to the manager to be active in managing risk in different market environments,” Belleri says.

HNWI focus

Schroders Italy Private Banking offers discretionary and advisory asset management for high-net-worth individuals. Belleri works in openarchitecture, selecting both Schroders investment products and third-party funds. The selection process is based on database analysis, where Schroders ranks the investment list and shortlist for each fund’s category.

“However, investment ideas very often have been generated from fund’s presentation or one-to-one meetings. We use a wide number of counterparts looking for experienced managers specialised in asset classes we look for,” he adds.

In quantitative screening, the firm associates the fund to the correct asset class and monitors the product in terms of risk/performance profile, beta and drawdown. “We avoid funds with no track record: we think that if a fund is well managed, it will be so not only in the present but also in the future. We don’t invest in strategy that we do not understand and avoid illiquid strategies,” Belleri says.

Risk management is approached on a fund-to-fund basis: “If we are confident in a manager’s ability to create alpha, we give the manager the freedom to take their bets, asking them to be conscious only of the risk they are taking. Otherwise, if we select a benchmarkdriven manager, we expect a greater risk control.”

Alternative Ucits funds, generally managed with an absolute return target, require a higher risk control, while non-Ucits products have more flexibility across different strategies, not having limits forced by Ucits regulation.

Belleri admits he prefers very liquid strategies to reach a good diversification level both in terms of strategies and investment approach: “We generally don’t see the Ucits regulation as a limit but as a greater guarantee of a controlled leverage, a lower concentration risk and of a good transparency level.”

Market sentiment in Italy has changed investors’ approach to foreign exchange markets, now considered a more complete asset class on its own. According to Armando Carcaterra, chief financial officer at Italy’s asset manager Anima SGR, the eurozone sovereign debt crisis is the main trigger that has supported the transformation of the foreign exchange market into a real asset class, improving the risk/return profile of many portfolios. Investments have been mainly directed to safehaven currencies such as Swiss franc and Nordic currencies.

“We also had good demand for emerging markets products, which has been steady during the crisis. This has been confirmed by the increase of assets allocated to global fixed income products,” he adds. So-called exotic or emerging investment funds have now become important tools to manage portfolio risk and diversification, as they allow to improve our clients’ risk profile.


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