Giorgio Mastropietro, fund selector at Italian independent wealth manager Sofia Gestione del Patrimonio, notes that alternatives can deliver the yield levels that used to be provided by ‘old bond portfolios’.
Italians have historically invested in sovereign bonds or Buoni Ordinari del Tesoro (BOTs), leaving aside the alternative asset classes even when they represent a “good answer” amid the current “absence” of yield, explains Mastropietro.
He has noted that the typical investor in Italy does not want a risky portfolio but demands a level of yield that is not feasible in this current low yield environment, so, increasingly, they are looking to substitutes for the “old bond portfolio”.
“Alternative strategies are the principal potential sub-stitutes and investors are starting to understand how a good alternative strategy can be profitable in risk/reward terms,” Mastropietro says.
To meet this need, Sofia is offering its alternative Ucits strategy with a basket of five to eight funds – a mix of long/short equity, bond and event driven strategies – focused on delivering a constant and absolute performance.
The strategy is not biased to any particular asset class, and focuses key analysis on correlations within the allocated funds.“Our evidence is that you can be extremely uncorrelated using strategies with the same underlying asset class.
The main point is how the strategy works with respect to the overall exposure, diversifying in asset classes cannot be a real diversification of risks,” Mastropietro says.
Milan-based Sofia Gestione del Patrimonio has around 35-40% of its investments in third party funds, as the firm’s investment team prefers this kind of exposure when it does not have direct expertise or when it is looking for a specific type of strategy that cannot be implemented by the wealth manager.
ACTIVELY MANAGED FUNDS
Most of the wealth manager’s investments are in actively managed funds, with a minimal exposure to tracker vehicles.
The firm uses all its available sources – networking, events and specialist publications – to undertake the first step in identify the funds for potential selection.
“The funds universe changes on a daily basis and you have to be really flexible in the first step of your due diligence: the research. Being adaptive with constant monitoring of market conditions and funds supply is a milestone of the fund selector profile,” Mastropietro argues.
After applying ad hoc research, Sofia Gestione del Patrimonio generates an approved list of funds, composed of traditional asset classes and other groups classified by type of strategies and outputs.
“We are always interested in every strategy: from the most simple long-only, to the most sophisticated ones,” Mastropietro notes.
“Focusing on a particular type of strategy can be dangerous especially in the short term: you can find many examples in the past showing negative cyclicality or sector rotation. From an asset allocation point of view we are interested in ‘niche’ absolute return (both in equities and bonds) and high yield products,” he adds.
Sofia’s first step for fund selection is quantitative. By using its in-house ranking methodology, the firm selects the funds needed within an Ucits universe, which then go through a qualitative analysis, consisting mainly in interviews with fund managers in order to go over the points provided via the due diligence.
High quality, trustworthiness, liquidity, transparency and confidence in fund managers are key pillars for Mastropietro when assessing whether to select a fund, which must have between €50m and €100m in assets under management in order to be selected.
“The more important skill [in a fund manager] is consistency. A fund manager has to apply the most efficient risk control to his strategy, in order to avoid unexpected problems,” he says.
On the other hand, red flags are found in technicalities, such as “style drifting”, that is, when the strategy is not in line with the portfolio composition; or in administrative aspects one such as a continuous changing of firm’s auditor.