The quantitative matter of fund selection

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Teodor Naoumov and Emilio Franco at UBI Pramerica attach high importance to their in-house quantitative selection model.

Fund selection in the Italian asset management space often relies on the personal relationship developed between selectors and portfolio managers, nurtured overtime by face-to-face meetings and by loyalty to a specific management style.

This is not the case at UBI Pramerica, the asset management arm of Italy’s UBI Banca, which was set up in 2001 following a joint venture between the Italian bank and Pramerica Financial from the US.

Since UBI Pramerica was founded, the firm opted to develop in-house quantitative tools to select funds which are now included in its proprietary platform. This is a strategy peculiar to the Italian industry, as was the decision to include the whole fund selection team, composed of 11 professionals, within the quantitative unit headed by Teodor Naoumov (pictured).

“Stock-picking models started to be less accurate in 2007, when a new highly volatile financial market required asset managers to find a new angle to approach stocks and funds selection,” says Naoumov.

“Changes in prices and trends happen in days now rather than months, and we use statistical and econometric tools to include historical performance against the benchmark in our analysis, which we calculate on a daily basis.”

Beating the benchmark

In detail, for each fund, UBI Pramerica considers the information ratio, performance drivers and volatility, and more in general the management style.

“We want to make sure each fund can constantly beat its benchmark and we use statistical methods to assign a score to each fund,” Naoumov adds. “We check the maximum loss and we try to understand how the performance was generated.

“As well as the funds’ performance, we qualitatively evaluate risk management processes, changes at corporate level, as well as people moves within the portfolio management team.”

The quantitative score, based on a formula designed by UBI Pramerica’s quantitative team, allows the investment management company to narrow down the number of funds which fall into its radar from 600 to around 10.

UBI Pramerica follows up its analysis on the shortlisted funds with a complete and more traditional due diligence based on the drivers of performance, management style, the investment house and its top management.

“We are mostly concerned about people moves within the management team and benchmarks used. We want to make sure the firm has sufficient assets under management, independent and solid risk management and a good in-house research team, safe custodian bank,” Naoumov says.

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