Typology of investment methods Janvier 2012
Describe an Expertise: the consultant approach (mandates) People Company description Investment Team in charge of the expertise : experience and background Investment Universe: What are the instrument used by the manager? Geographical criteria, asset classes, derivatives, number of securities in the manager s radar Investment Philosophy What are the reasons you beleive you could add value to the portfolio? What type of strategy will you implement? Investment Process Implementing the strategy: the value chain Risk control and follow up of the book Performances (net of fees) Did the strategy (out) performed? Are the results in accordance with the philosophy? Reporting and documentation Linked to the investment philosophy and process 2
Experience Assets Under Management AUM Since when? The extent of the range Team Number of people dedicated to the expertise CVs The team in the company The individual in the team Too many team kills performance Study of Jim Hunter, "not to teamwork and an obsession to return to more balanced interactions, to subdivide the large existing teams, and focus on individual decisions and mixed decisions only at the expense of college." 3
Investment Philosophy (Credo) The principles that drive management decisions, structuring teams and tools Use this framework to bring out your ideas One thing And its opposite And what about you? CAPM Active Passive Active risk allocation and contribution Behavioral Contrarian Trend follower Contrarian based on fundamentals Cultural Top Down Bottom up Top down Method Quantitative / Systematic Humanfactor Team / Organization Discretionary Individual Quantitative when appropriate to generate ideas and risk monitoring but mostly discretionary Small team Source of inneficiency «Market» valuation model Thorough information set Market model for economic Information set mainly for unliquid sectors 4
Investment philosophy : Are security prices predictable? / Prices and fundamentals Financial and economic information is widely available to any investor. Valuation methods for any asset class are known. Forecasting is hazardous in«normal» financial conditions. Nevertheless, like tectonic, economic imbalances are often corrected through crisis rather soft changes. Hence fundamentals can be contradicted by market prices during a significant period of time before mean reversion suddenly happen. / Rationale for a dynamic asset allocation When markets do not exert large valuation imbalances stay benchmarked Large imbalances due to overconfidence or extreme pessimism are source of opportunities 1 : Bull Reverting 2 : Bull Trend 3 : Bear Reverting 4 : Bear Trend 31, rue des Poissonniers 92200 Neuilly-sur-Seine 01 55 62 19 80 01 55 62 19 81 @ info@wiseam.fr 5
Investment philosophy : Cope with the deleveraging paradigm Shorter and more volatile financial cycles with low drift The current crisis started in 2007 is the outcome of a structural change in world economic dynamics. Deleveraging reduces the prospect for GDP growth. Hence, trends on asset returns have been revised down. Growing uncertainties in economic trends also speeds up financial cycles and increases volatility. Strategic implication for wealth management Diversified your assets between safe heaven and risky yielding assets Favor an active management in a contrarian style 31, rue des Poissonniers 92200 Neuilly-sur-Seine 01 55 62 19 80 01 55 62 19 81 @ info@wiseam.fr Source: BNY Mellon 6
Investment philosophy : 4 proposals to build up performance / Proposal 1: Define a risk budget in accordance with your objective. Monitor the acceptable loss more than the expected return / Proposal 2: Select investment theme with a contrarian bias. Shape portfolio risks in accordance with market phases. Look for opportunities in specific themes (dividends, baking sectors, rebuilding of international monetary system) / Proposal 3: Implement multi asset manager portfolios. More complex market organisation requires investment specialists by sector/asset class Multi asset management gives a simple access to these specialists Wiséam has developed capabilities to implement optimal portfolios: Thorough research with selected specialist team to catch the many dimension of an asset class/fund Risk and accuracy monitoring of portfolios related to objectives 31, rue des Poissonniers 92200 Neuilly-sur-Seine 01 55 62 19 80 01 55 62 19 81 @ info@wiseam.fr / Proposal 4: Report. Fundamental step to build up long term confidence between the asset manager and the investor. Wiseam has set up different reporting tools to: Measure performances and risks Explain investment strategy, trades and results Present outlooks 7
Management methodology (investment process) While investment philosophy summarize general investment principles, investment process details implementation of the investment philosophy How do you detect an opportunity (idea generation)? What are the criteria for security selection? Quantitative / discretionary filters Value analysis Catalyst search Valuation model DDM securities Bonds: Yield curve How to build the portfolio? Concentration vs diversification (constraints) Frequency of portfolio review Optimization tools or decision support Do you have a sell discipline? is there a price target? Failures management Depending on how often the strategy is re-evaluated? 8
Example of process: WORLD EQUITY Fund 9
Risk monitoring Operations Control Compliance with the funds approval Quality of execution (timing) Control at different levels Manager / middle office / Back Office Risk Management Unit Depositary A priori Risks control What are the potential risks of the portfolio? Are they accepted? Sectorial, factorial, concentration... bias Stress test VaR, stress test Tracking error A posteriori Performance monitoring But it's too late! 10
Analytical tools Documentation produced by the Asset Management Company Institutional presentation of the company, what is environmental management? Powerpoint presentation of the expertise or funds Due diligences Periodic reporting Monthly Quarterly Investigation of the breeder Analysis of results Factor models Evaluation of the universe Analysis of relevant documents vs analysis of results. One to One with the manager or product specialist Confrontation between the quant and qualitative analysis Reading of the market dynamics Are the concepts in line with the process presented? 11