Running the winners and cutting the losers
Interview with Gianmarco Mondani – The current market environment makes it difficult for many investors to reach their objectives. Many assets are too volatile, while others do not yield enough. Low growth and interference by politicians and central banks make it likely that the world’s economic problems are here to stay for quite some time.
This means that strategies that harness beta are likely to struggle over the medium term and are too unpredictable for many investors. Instead, a non-directional approach, minimising beta exposure, while focusing on consistent alpha generation may prove more effective. GAM’s Gianmarco Mondani (pictured), who has followed and developed this philosophy since 2002 certainly thinks so. Back then he had realised “that most hedge funds incorporated a lot of beta. We sought to identify a methodology that was conducive to alpha generation”.
Over a decade later, Mondani heads up an investment team at GAM, which manages over USD 1.2 billion of client assets, primarily in long/short equity strategies, from its office in Lugano. The highly experienced, nine-strong investment team developed its track record at boutique investment manager Arkos Capital, which was recently acquired by GAM.
When developing his approach, Mondani ultimately concluded that the one strategy that consistently performed was to anticipate companies’ earnings surprises. He explains: “As a strategy, buying companies with positive earnings revisions performed far better than other approaches, whereas buying companies with negative earnings revisions made considerably less money.” These two opposing forces form the basis of the team’s long and short books.
The team combines a range of proprietary screening tools incorporating earnings, valuation and momentum models to help identify those companies most likely to experience earnings revisions. “Historical evidence”, Mondani insists, “shows that an earnings revisions approach works best when supported by valuation and price momentum. If price momentum is supportive, the team will have higher conviction in a stock’s positioning, reinforcing our strong discipline of buying on pricing strength and selling on weakness – or putting it another way, running the winners and cutting the losers.”
The final portfolio is a balance of long positions in those stocks that are likely to beat analysts’ expectations and short positions in those stocks that are likely to miss analysts’ expectations. The sizing of positions depends on valuations and price momentum. If these are favourable, the managers will reflect this in the sizing of the position. Liquidity is also a consideration.
Risk management is inherent in each part of the process. Portfolios are well diversified with generally no pre-determined limits in terms of sector and/or geography. Importantly, the team seeks to mitigate correlation to all factors that are not alpha sources, but does not attempt to time the market. Portfolios aim to provide consistent returns with low volatility and low-beta or beta-neutral targets.
Mondani’s team currently manages developed Europe and emerging market long/short equity portfolios, as well as dedicated financials and convertible bond strategies.
Alpha is hard to come by and over the past 10 years, Mondani and his team have shown that earnings revisions are a consistent and reliable means to deliver it. In range-bound markets, their non-directional, low-beta approach has produced strong risk-adjusted returns with limited exposure to underlying markets. The strategy has served the team and its investors well through a range of market conditions thanks to its focus on single stock differentiation.
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