Epsilon SGR

The team is made up of portfolio managers specialised by management models (multiple-factor stock picking models, dynamic strategies, tactical asset allocation). Team members manage the portfolios, or part of them (both directly and in delegated form) mostly using quantitative models. The team also engages in research and development activities on quantitative models with the aim of further improving the management of the assets entrusted to the Company.

The team is led by Maria Bruna Riccardi.

The team includes portfolio managers specialised by type of issuer and financial instrument (money markets, government bonds and spread products). The team offers high-discretion portfolio (full or partial) management services (both directly and in delegated form) geared to creating return while managing risks tied to the components represented by products in securities with exposure to specific target markets and/or asset classes. Based on the analyses carried out, baseline scenarios are drawn up to support the definition of investment views.

The team is led by Luca Sibani.

Relative value

Epsilon applies relative value models to both its stock and bond portfolios. Relative value analyses make it possible to:

• Systematically use all the information available on the market
• Concentrate on a few securities, selecting those with the strongest growth potential, to outperform the benchmark (active security picking)
• Build a portfolio with a similar risk structure to the benchmark’s, but with more appealing prospected return.

The relative value model drawn up by Epsilon for Eurozone and European equity portfolios uses statistical instruments to identify the macro factors (business sector, country) and micro factors (fundamental balance sheet data, market trend indicators, financial analyst expectations) most closely correlated to the relative value of each individual security. Based on the macro factors, it subdivides the universe of securities into consistent groups; based on the micro factors, it carries out analyses of individual securities and determines their relative value. Lastly, every day it selects the securities with the highest relative value.

The portfolio is monitored on a daily basis in order to verify the effectiveness of factor exposures, active choices, and systemic risk components.

The relative value model drawn up by Epsilon for euro area government bond portfolios uses statistical instruments to identify the factors most closely correlated to the relative value of each individual security, such as duration, date of the security’s position on the term structure of yields, the country of issue emission, and its intrinsic characteristics.

The model valuates all the securities that can be invested in (represented by the benchmark) in relation to the term structure of monetary market euro rates and, by drawing this comparison, determines the extent to which the difference between market value and estimated value depends on the intrinsic characteristics of the security.

Based on this analysis, it ranks securities by convenience and subdivides the term structure into segments in function of residual life, selecting for each segment the most convenient securities. Lastly, it builds the portfolio in such as way as to guarantee a similar level of risk to the benchmark’s.

Dynamic hedging

Epsilon uses dynamic hedging models with the aim of protecting assets during market downswings, by changing the portfolio’s exposure to risk assets, and benefiting from market upswings.

The dynamic hedging model drawn up by Epsilon establishes minimum targeted return on a set time horizon and, for market index representative of the risk assets, analyses the probability of achieving higher return than the minimum target. In function of this probability, the model changes the portfolio’s exposure to risk assets, progressively increasing it during upswing phases on the market addressed, or reducing it gradually, even to zero, during downswings.

The residual portion of the portfolio is invested in monetary market instruments.

Index tracking and/or relative value techniques are used at the same time to create portfolios of risk asset (government bonds and/or stocks) capable of replicating the trend of the main indices.

Index tracking

Epsilon uses index tracking models for the Eurozone and European stock markets, with the aim of:

• Replicating the trend of the market index investing in a limited number of securities;
• Obtaining a portfolio with similar return and risk profile to those of the market addressed, benefiting from lower transaction costs.

The index tracking model created by Epsilon identifies macro factors, such as the business sector and the country of origin, and micro factors, such as the market capitalisation of the security each security’s exposure to market risk (beta coefficient), that determine the structure of the market index considered.

Based on the macro factors, it subdivides the universe of securities into consistent groups; based on the micro factors, it defines a scale of values to apply to each individual security in accordance with its correlation with the index to replicate; lastly, it selects from each group the securities most closely correlated with the index.

Multistrategy

Epsilon takes a multi-strategy approach with risk control (VAR) in order to achieve total return objectives.

This approach makes it possible to:

• Diversify investment by asset class and geographical region
• Diversify sources of return generation
• Achieve consistent return over time with the predetermined risk profile

The multi-strategy approach translates into an investment process that strives to:

• Invest liquidity in risk-free assets (monetary instruments, deposits)
• Generate return over time using a broad universe of strategies across interest rates, exchange rates, credits, and stocks
• Control in real time  the overall risk tied to the portfolio and to individual strategies.

The decision-making process behind the strategies è guided by investment views, that translate into directional choices on the main asset classes: government bonds and interest rates, corporate bonds, forex credit and stocks.

These directional choices stem from the analysis of three elements: baseline macroeconomic scenario, valuations, positioning and market sentiment.

Investment views are on a 6-12 month horizon, but are revised monthly. In determining exposure to the stock markets, the process also relies on the support of the quantitative tactical asset allocation model.

The portfolio is monitored on a daily basis in order to verify the effectiveness of the active choices and the components of systemic risk.

Tactical asset allocation

Epsilon uses a tactical asset allocation model with the aim of investing on the international stock markets taking a flexible approach, and achieving over the long term higher return than the stock market, mitigating risk.

The portfolio tactical asset allocation model built by Epsilon identifies a set of macroeconomic and financial variables that help forecast the trend of the stock market, and estimates the probability of the stock market generating positive return based on the aforementioned variables, as well as the size of the return.

The model then assesses the risk tied to the investment in stocks in the following period; it defines exposure to the stock markets using the estimates drawn up, and periodically adjusts exposure in function of the evolution of the estimates.

Il portfolio is monitored on a daily basis in order to verify the effectiveness of the active choices and of systemic risk components.