The Hedgeweek Interview: Enrico Angella & Aurelio Matrone, Getraco Asset Management: Maintaining competitive advantage through tight control
Enrico Angella and Aurelio Matrone discuss the multi-layered investment strategies that define Getraco's Kkienn European Fund.
Enrico Angella, Managing Director, founded the Kkienn European Fund Ltd in 2001. Enrico's main background is in asset management and equity research. He previously spent eight years at leading asset managers. From 999-2001, he was Head of Investments at Dresdner-Albertini SGR running international equity's investments with a focus on total return approach and AuM of EUR750 million. Between1998-99, Enrico was Investment Manager in European's equity investments at Robert Fleming. Prior to that, he headed the Italian Equity's investments and Equity Research, with a total AuM of EUR 750 million at Mediolanum Gestione Fondi. Enrico has a doctorate in Business Economics.
Aurelio Matrone is Investment Manager of Getraco AM since 2004. His main background is in fundamental analysis. He previously spent five years at top investment banks / boutiques, Vitale & Associati (2002-03) and Mediobanca (1999-2003) as corporate finance manager and equity research associate on consumer goods, industrials, utilities and holding companies. Aurelio was part of the team involved in the restructuring plan of the Fiat Group (Vitale & Ass.) and equity capital market team, managing the privatisation of ENEL (Mediobanca). In 1998 he was awarded a one year internship at Salomon Smith Barney in London in the equity research division. Aurelio has an MBA in International Finance and a Doctorate Degree, magna cum laude, in Business Economics.
HW: What is the background to the fund?
EA & AM: Kkienn European Fund Ltd. (Long / Short Equity) was launched in June 2001 under the name of Prometheus European Fund. The current name was introduced at the end of June 2004 with the launch of the new business model. According to this, the managers maintained unchanged the investment philosophy, based on exploiting the existing asymmetric information in the equity financial markets across Europe, so as to discover hidden value (or surplus value for shorts), and at the same time the investment process was completely internalized. The investment responsibility is currently controlled by Enrico Angella and Aurelio Matrone.
At the end of April 2006 the Fund AuM amounted to EUR 60.7 million.
HW: Who are your service providers?
EA & AM: Our Investment Manager is Kkienn Investment Management Limited, Nassau, Bahamas. Our Investment Advisors are Getraco Asset Management SA, Lugano, Switzerland. Our custodian & Prime Broker is Morgan Stanley & Co International Limited London, UK. Our Administrator is IMFC Fund Services, B.V., Amsterdam,The Netherlands. Our auditors are Deloitte Accountants, BV, Grand Cayman, Cayman Islands. Our Legal Advisers, (as to Cayman Islands Law) are Walkers, London, UK. Our Sponsoring Brokers are J&E Davy, Dublin Ireland.
HW: How and where do you distribute the fund? What is your current and targeted client base?
EA & AM: The Fund has two kinds of potential clients: i) High Net Worth Individuals; and ii) institutional investors (Fund of Hedge Funds, Pension Funds, Banks, Insurance Companies, etc). As the Fund is listed on the Irish Stock Exchange, it is subscribed through any bank or other similar financial broker.
HW: How do you generate ideas for your fund?
EA & AM: The generation of business ideas represents the first stage of the Kkienn Investment process. Managers use a matrix approach to scout potential successful (longs positions) and/or unsuccessful (shorts positions) equity stories. One, they operate a quantitative model linked to Bloomberg data base enable to point out stocks and/or stocks panel with anomalous indicators such as, analysts financials upgrades/downgrades, cheap/expensive multiples, under/out performance, etc. Second, a direct screening executed in the market place through company visits, brokers and investment banks origination.
HW: What is the investment process of your fund?
EA & AM: Following a successful scouting stage the investment process in structured in other three stages:
Stage II - Due-diligence: Starting from the stocks with the highest potential hidden value, the Managers undertake the due-diligence process, structured as follows: I) last reporter three years economic/financial analysis; II) management background due-diligence; III) industry / competitive arena analysis. If and when these stages are completed successfully, a top managers meeting is organized in order to discuss: A) business plan assumptions and targets; B) SWOT & Porters' analysis issues. If and when A & B are completed successfully, the Kkienn Managers operate a consistency analysis through peers analysis. The due-diligence is thus completed with: 1) definition of target price (DCF, EVA, multiples) and 2) triggers mapping in order to maintain a tight control of hidden value transferring into the stock price as expected.
Stage III - Investment: The investment stage is structured in two parts: I) Kkienn acquires an entry stake (usually between 0.5-1% of the total AuM) to verify the consistency of the internal pre-investments analysis with company financials deliveries and management capability to maintain good relationship with minorities institutional shareholders; II) if and when this stage is completed successfully Kkienn operates a further stake building according to the target position on the stock/industry.
Stage IV - Monitoring / Closing the position: The monitoring process is operated through company visits and or conference call executed at least in interim periods and news-flow. All financial models (for both long and short positions) are internally developed and structured by interim P&L/BS and/or by the other significant fundamental indicators to be taken under control.
The positions are closed when: I) the target price is achieved; II) some investments assumptions are removed (difficulties to achieve targets; way-out of key management; change in industry/competitive scenario; etc).
HW: What is your approach to managing risk?
EA & AM: The risk is managed under a double approach:
The operating approach: The implied portfolio risk is first of all run through a diversification between long and short positions. The distribution of long/short positions among industries is operated taking into account the correlation between the companies expected results/corporate actions and the expected evolution macroeconomic variables (Ex.: oil shortage and oil capex vs. oil related companies for long positions and inflation risk for short positions; etc). Nevertheless, the Managers recognise that an accurate execution of the investment process represents the main and effective risk control operated on the portfolio.
The KRM: Kkienn European Fund has internally developed its own model (the 'KRM') enabled to evaluate constantly the correlation between any single position and the portfolio with a huge number of macroeconomic meaningful variables, such as the exchange rate EUR/USD; oil price, interest rates, and stock exchange indices. The Managers have constantly under control the degree of risk assumed, and are enable to hedge the portfolio both if compared with indices and single stocks.
HW: How/against what do you benchmark the performance of your fund?
EA & AM: Kkienn European Fund is a total return product, so that has basically no benchmark. Despite this, the Managers have clearly in mind that clients are used to comparing Kkienn performances with peers. So that, performances are compared with the most meaningful index, taking into account that Kkienn is an open-ended Fund long / short equity. The index used is the HFRX Index Long / Short Equity. The comparison analysis offers also a constant measure of the business model soundness, and an implied index of capability to growth.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
EA& AM: The Manager does not have a quantitative budget in terms of performance, but a qualitative one in terms of top-end standards. The internalization of the investment process has produced interesting results, but the focus is and will remain the top-end quality of work, in all four stages of the investment process. This makes the Managers confident to deliver sound result in the medium term.
The strategic thesis is and will remain: 'equity financial markets are inefficient. A large amount of hidden value or surplus is not reflected in the stock prices'. A very deep bottom-up approach, using a private equity metrics on under-researched public companies is enabled to create value to the Fund shareholders.
HW: What opportunities are you looking at right now?
EA & AM: The Kkienn investment process is structured to produce constantly new business ideas. The Managers are currently taking under due-diligence a number of single successful (disappointing) equity stories, without a defined focus on a specific sector, in order to maintain a huge level of diversification (see the description of the 'operating hedge').
HW: What events do you expect to see in your sector in the year ahead?
EA & AM: In the asset management industry, we expect the offer will continue to be at high level both in terms of new professionals entering the hedge fund business, and in terms of exits due to disappointing results (within the first three of life). This trend will continue to be boosted by the increasing demand for sophisticated products enabled to deliver positive results in any market condition.
We will probably assists a gradual consolidation of hedge fund industry in the medium time, when Managers will realize that approaching a winning business model enable to satisfy clients expectations is not an easy game.
HW: How will these changes/future events impact on your own portfolio?
EA & AM: After a five year track record, and a defined business model we expect to play an active role in the industry both in terms of AuM increase and performance achieved.
HW: What differentiates you from other managers in your sector?
EA& AM: Most of our other competitors operate business models too much exposed towards investments banks and brokers, both in terms of origination of new business idea and execution. The risk is to tend to do much the same things in the same way at the same time.
The Kkienn Managers are used to anticipate brokers and investment banks. The internal tight control of all four stages of the investment process is structured to achieve and maintain this competitive advantage. Only an internalized investment process is enabled to exploit efficiently the value hidden in the public equity asymmetric information.
HW: Do you have any plans for similar/other product launches in the near future?
EA & AM: The Kkienn Managers has clearly in mind a medium term strategy in order to offer a number of products enable to match the sophisticated client's requirements. New products will be launched at previously defined timing after having achieved budget targets.
(Enrico Angella and Aurelio Matrone were interviewed on 8 May 2006; the interview was revised on 25 May 2006)
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