Equity multi-strategies: more than alphas

Can you start by defining this multi-strategies approach to equities? Should clients think of it as long-only or absolute return? Christophe Lemarié: It is not absolute return because there is beta in the approach and the benchmarks are standard equity indices. But we want clients to concentrate on the information ratio delivered. We expect to keep this surprisingly high by the combination of strategies with low correlation. As we do have the facility to go short in some of these underlying strategies, it’s not entirely accurate to label it long-only either. Let us jump straight in then: what is the target information ratio? CL: Since we started it has been in excess of 1. We expect a sustainable level is closer to 1. Even aggressive long-only managers rarely promise information ratios above 0.5. How do you compile equity strategies to achieve figures that are higher? The foundation strategy is enhanced index tracking, in which CAAM has a fine record. Over the last five years, many European investors have found the risk-return characteristics of enhanced tracking appealing. We agree with this view while seeing room for even better risk-adjusted performance by overlaying enhanced with numerous other strategies: from fundamental to restructuring stock picking. We fold in directional volatility and volatility arbitrage as well as good diversifiers. What we focus on is lack of correlation so as to ensure to be superior to the market. Do you swap between these strategies tactically? CL: No, at least not for European stocks. When we go out globally, then tactical asset allocation makes more sense. There is sufficient diversity to make swapping between countries and market sectors and even currencies worthwhile. For Europe – where we have euro-zone and pan-European versions of multi-strategies – the allocations to the underlying strategies are fairly constant. We have daily risk monitoring, and there are strategies in-house which are currently either fallow or simply under watch, but we are not switching between the underlying greatly. Currently we are using a dozen strategies and the asset allocations reflect their risk-adjusted contribution. Thus, the most aggressive strategy would likely receive a small portion of funds. The best way to understand this approach is to remember what we are striving for: stable outperformance. Some multi-strategists merely want the flexibility to follow their best ideas and take the fund to a weighty growth bias, or small cap bias, or technology sector bias; all with the proviso that this theme may be supplanted at a later date. Over the very long term that approach may have benefits but the kind of constancy we seek is more regular. Clients should be able to see the good results from year to year. An obvious question: why stick to in-house portfolio managers in an era when houses even with greater assets under management than CAAM employ third parties in some multi-strategy offerings? CL: The singular advantage we take from keeping things in-house is common appraisal of the strategies. All the portfolio managers are open to us; we can see everything that they do and both ex ante and ex post risk measurement is standard across the strategies. This does not impinge upon the portfolio managers’ freedom. Remember that all these people are running money successfully – CAAM multi-strategies is just another client. But I am not sure that if you are constructing a similar product using external providers, you will ever be absolutely certain that they are all using the same assumptions and metrics. Therefore how can you be sure that your valuations are standard? CL: We don’t rule out using third parties. In order to be confident that we can wring the return we want out of these strategies, it is a great help to analyse them on a common basis. And when you are in a big company like CAAM, it’s also true that you can develop new strategies with confidence. The necessary resources will always be there. Do you expect to introduce more shorting strategies into the fund, given its directional bias? CL: CAAM has had a long-short European equity fund for more than one year. Under UCITS III, however, it could not go more than 10% short. That was the rule. For this reason we are now using swaps on contracts-fordifference (CFDs). Now the fund can go 165% long or short, which is far better for executing the portfolio managers’ best ideas. We at the multistrategies equity team have a watching brief on the fund and if all goes well with its newfound freedoms, we will include it in the medium term. It is worth saying that we are happy with the contribution derived from the beta in multistrategies. This is ameliorated by several sources such as the enhanced approach but also the fundamental stock-picking team. The challenge for institutional investors who want to separate alpha and beta is attributing pure alpha in stock markets. How much is directional alpha? CL: It’s a complicated characteristic to analyse. When we want to isolate the skill of our stock pickers we neutralise the benchmark’s influence by shorting it. But we recognise that some portfolios have a beta above 1 and some below 1. It is a challenge, especially for any house promising pure alpha, to prove the absence of any market contribution. In some ways, CAAM’s multistrategies approach to European equities seems to be an evolution of the core-satellite approach. Would you be happy with that conclusion? Yes, so long as you emphasise the evolution. It is a testament to financial markets that we now have the capability to refine our services in order to offer better risk-adjusted returns. Enhanced indexation makes for an excellent core and our satellites are the right distance away to provide diversification without spinning out of orbit and upsetting stable outperformance. Written by Crédit Agricole Asset Management, a joint stock company (société anonyme) with a registered capital of 546,162,915 euros. An investment management company approved by the French Securities Authority (Autorité des Marchés Financiers - “AMF”) under No. GP04000036. Registered office: 90, boulevard Pasteur 75015 Paris - France. 437 574 452 RCS Paris. In each country where they carry on investment business, Crédit Agricole Asset Management and its affiliates are regulated by the local regulatory authority. 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Christophe Lemarié head of Equities, Global Balanced and Convertibles Bonds, Crédit Agricole Asset Management