Replicability, consistency and transparency top three attributes in fund selection, says Eurizon
The top three attributes that in current market conditions take priority in the fund selection process are replicability of performances, consistency of investment process and transparency of portfolio management activities, says Oreste Auleta, head of wrapping and product management at Eurizon Capital.
“The debt crisis in the eurozone is definitely affecting the market sentiment in our country. The crisis has pushed Italy to adopt an agenda of deep reforms and has accelerated steps and changes that otherwise would have required years to happen,” says Auleta.
In the current scenario, Eurizon looks for money managers with a history of successful active management based on strong investment teams, good investment processes and overall robust company organization.
“Replicability of performance means that we like managers with track record showing their ability to perform over time, through different market conditions. The investment process has to be consistent with the style declared by the investment manager and with the source of performance,” the manager tells Investment Europe.
For example, in analyzing fundamental based stock picking asset managers, Eurizon asks for analysts with sufficient experience and adequate incentives to provide the proper support for portfolio manager.
Transparency also plays a strong role in the selection process. “We avoid managers with a non-disclosure policy because we need to monitor what our managers are doing in order to take informed investment decisions,” Auleta says.
The most common quantitative selection criteria are excess return compared to the benchmark, tracking error volatility, alpha, beta drawdown (absolute and relative) and fund volatility.
Auleta adds peer group analysis is also important to identify funds with similar investment philosophy and compare them.
Grinold’s Fundamental Law of Active Management also provides with a framework for fund selection activities. The law states that the information ratio for any strategy is connected with the number of independent bets and manager’s forecast abilities.
“Over time, we have developed a very clear picture of the upper bound of the value added by standard investment strategies. This is a very powerful way of assessing if very good results achieved by a fund are sustainable or over a sustainable path,” he says.