Rui Machado (pictured), head of Fund Selection and Alternative Investments at Portuguese asset manager IM Gestão de Ativos, explains why his team is seeking funds to reduce risk and decorrelate investments.
The fund selection team of IM Gestão de Ativos is currently looking for investment vehicles that can reduce risk in the portfolios of the asset manager’s range of funds.
The reason is simple, explains Rui Machado, who heads fund selection at the asset manager: “With a few exceptions, we don’t see any value in the fixed income space and equities seem to be fairly valued.
“In other words, in general we consider that currently the risks outweigh the benefits of being invested so we’re being patient, reducing the risk, and expecting a better entry point to increase the long positions in our portfolios.”
Thus, the greatest appetite right now is for strategies that can offer a way to mitigate independent risk but also to decorrelate investments.
“Currently the main strategies with this sort of characteristics are absolute return and short term fixed income funds,” Machado notes, adding that his fund selection team is actively searching for these sorts of funds.
ABSOLUTE RETURN DIVERSIFICATION
Machado’s team is also pushing to increase the diversification of the firm’s absolute return model portfolio, where there is room for higher risk funds – independent of strategy – combined with other ideas such as long volatility funds to balance the portfolios.
Last year, the asset manager increased investments in absolute return funds, although the proportion invested in this type of fund tends generally to be limited to no more than 10% of assets.
IM Gestão de Ativos, which currently has close to €1.7bn in assets under management, invests about 35% of this in third-party funds – including exchange traded funds.
Actively managed funds account for 25% of the asset manager’s total investments; ETFs make up about 10%, while index tracker funds – non-ETFs – make up about 1%.
From an “approved list”, the firm’s multi-asset managers select funds that better match their needs.
The list, however, does not cover all asset classes and from time to time there might be an interest in a specific one. In this case, the fund selection team runs an ad hoc search to find the best fund, according to the needs of managers, Machado explains.
Through a Lipper database and “extensive contacts” within the fund industry, the asset manager “is always looking for new funds to improve returns”. Thus, one of the main tasks for the team led by Machado is to constantly identify new managers and funds.
QUANTITATIVE FILTER
The selection process usually starts by applying a proprietary quantitative model that seeks to rank the best funds in terms of consistency and risk adjusted returns.
“However, we see this model as a way to filter down the number of potential investment candidates and not as a final decision making tool,” Machado says.
The second and “more important” step in the fund selection process is the qualitative analysis where the team assesses managers’ skills, characteristics and risks.
“It’s worth mentioning that we select several managers per universe and we also use our qualitative analysis to make sure that our managers have a unique style,” he notes, adding that consistency is the most valued manager attribute.
“We do not like to invest in management groups with significant rotation of staff or styles. The other main characteristic that we look for is a good relative risk/reward ratio. We try to avoid the ‘flavour of month/year’ because in general the returns of these types of managers tend to be unreliable and unsuitable for a long term investor like us,” Machado explains.
The most obvious red flag when selecting a fund is change in key investment personnel.
“Whenever a fund changes manager we will perform a new qualitative analysis and if we feel that the change will affect the strategy then we automatically remove the fund from the approved list,” Machado says.
“Also, whenever we don’t understand a strategy or the way that the fund is managed we decide not to pursue the investment. We don’t have automatic hard rules that depend on track record or assets under management to exclude funds,” he adds.
