Turbulence is expected to persist in 2017 and Ricardo Duarte, head of Research and Strategy at CA Gest, is pinning his hopes on alternatives to generate consistent returns.
With most of its clients being insurance related companies, the asset management division of Portugal’s Crédito Agrícola Group uses an asset liability management (ALM) approach in many of its portfolios, which makes it a “natural” buyer of European fixed income, such as government bonds and investment grade corporate bonds, which are also less capital consuming assets, Duarte says.
But given the high degree of uncertainty following Donald Trump’s election as US president, Duarte’s team is not excited by the short/medium term outlook for traditional asset classes such as bonds or equities. Following the US election results, yields trended higher in global bond markets and equities seemed to be “overly optimistic” on growth and inflation looking forward.
In such an environment, the CA Gest fund selection team “would be keen on adding all kinds of non-correlated strategies within the alternatives space,” such as long/short equities, equity or bond market neutral, multistrategy funds, total return or unconstrained, Duarte explains.
As a backdrop, the “painful” post-crisis low-rate environment for long-term bonds means investors no longer can expect yields to contribute positively to performance as in previous years.
This is why, Duarte notes, being flexible and using hedging instruments will be key in 2017. CA Gest currently manages about €2.5bn, of which roughly €100m accounts for third party funds, including property.
The asset manager tends to invest directly in European fixed income markets and, for mutual funds, it focuses on a few segments such as alternatives and equities, investing mainly in actively managed funds – although it also uses tracker funds, mainly for tactical purposes.
“If, for instance, we want to increase our exposure to European equities at a certain stage – above the level we consider our structural allocation – we will use ETFs or trackers in order to keep some flexibility after the move,” Duarte notes.
Duarte’s team does not use an approved list of funds, as they select depending on the needs of a particular portfolio. At the fund selection level, CA Gest does not require a minimum size or any kind of inception prerequisite.
“It’s mostly a case-by-case decision but of course we will give some preference to a strategy with a longer and proven track record. Regarding the size, it’s a different thing – not too small nor too big tends to be the answer,” Duarte explains.
The fund selection starts with a quantitative approach through analysis tools provided by Morningstar or Bloomberg. After identifying potentially interesting fund ideas, the GA Gest team monitors the fund’s performance against their peers within a proprietary scoring model based on metrics such as risk/return, Sharpe ratio, annualised volatility or drawdown.
Duarte’s team then moves to a more qualitative analysis and tries to meet with the asset manager to gather further information on the fund’s team, process and strategy. The most valued attributes in fund managers are their ability to provide consistency of returns, their risk management approach and transparency of the information disclosed.
“We like to fully understand the drivers of performance in order to identify in advance which risk factors the fund is more sensitive to,” Duarte says. Having a “disciplined investment process and a clear and well defined risk management framework” are crucial risk control skills sought out by Duarte’s team.
“Correlation monitoring, risk budgeting and VaR analysis are key to avoiding unexpected drawdowns and a dramatic change in the risk profile of the fund,” Duarte says. On the other hand, a profound change in the management team structure, a “drift” in style or an unjustified correlation with a certain asset class would be a clear red flag, he points out.