Gisbert Lang, senior consultant in Manager Research & Selection for Allianz Global Investors outlines the importance of understanding how managers manage risk at the portfolio level.
Allianz Global Investors (Allianz GI) has over a decade of manager selection experience targeting numerous client relationships. The group offers a wide range of actively managed strategies and solutions across the risk/return spectrum. A dedicated manager research and selection team coordinates all activities from setting the strategic benchmark through to implementation, explains Gisbert Lang.
Risk management and analysis of related risks is a key element of the entire manager selection process. Increased complexity and turbulence in financial markets as well as continuously changing regulations make it even more important to understand sources of risk and how they could affect client portfolios. Risk management and understanding of risk is therefore key component of successful manager selection, Lang adds.
Allianz GI selects both active and passive strategies. Tools used to achieve this include, for example, Evestment and Morningstar which are used to screen the investment universe and the single peer groups. Meetings are held with managers to get to know new approaches. And there is also reliance on trade publications to remain up-to-date with latest investment innovations. The selection activities are pursued both to create an ongoing approved list, but also to seek out funds on a more ad hoc basis. “We use a buy list of standard recommendations for each peer group. We conduct an individual due diligence process for more complex and customised searches,” says Lang.
The strategies sought out often depend on the asset allocation of the client, which means that there may not be so many esoteric segments to chase. One trend noted, however, is in equities, where the selection team sees increasing demand for risk premia investments.
Market intelligence and access to the markets facilitate detailed searches even before specifics are put in place, ensuring a high level of ongoing understanding of what funds may be available once particular searches are asked for.
“Our selection process starts with a quantitative screening in order to narrow down the eligible manager universe. This is supported by a detailed quantitative analysis including style analysis. The bulk of the analysis, and the decisive part, is the qualitative assessment which is based on RFPs, manager interviews and onsite due diligence visits.
We have elaborated a sophisticated criteria set in order to get to a complete and comprehensive picture of a manager,” adds Lang. Although responsible for equities, Lang says he likes to see managers with a broad range of alpha sources and well thought out risk management.
Consequently, he embraces investment approaches with a high active share and shies away from strategies with high tracking error. He also avoids managers with undisciplined or vague stock selection processes and who neglect risk management. He also looks to whether track records show heavy outliers. Lang notes that absolute return has gained a major role in many strategic asset allocation decisions by clients in recent years.
The majority prefer onshore solutions, and in a choice between equivalent regulated or unregulated hedge funds, AGI will prefer the regulated ones, he adds.
When it comes to risk control skills, Lang comments: “We differentiate between independent risk oversight on a company or department level, and risk management on a portfolio level. Risk oversight is very often well established, whereas risk management during the portfolio construction process is quite frequently ignored.
We look for managers who are benchmark conscious and try to avoid unintended risks – exposures, sensitivities – in their portfolios. “In five years’ time compared to now, I see a trend towards disciplined, benchmark aware and risk controlled funds, or on the other hand towards long-term, high alpha seeking, benchmark agnostic approaches. Funds ranging in the middle will most likely have a tougher life.
“I think that mutual funds and segregated accounts remain the preferred vehicles for institutional clients, especially for equity investments.”