Interview with Victor Brunello, Unifortune

By 13. August 2013 Interview No Comments

Victor BrunelloVictor Brunello has over 30 years of experience in investment banking, asset management and hedge funds in various institutions like Interbanca, Saifi (Ifi-Fiat group), JP Morgan, CoFi and Unifortune Asset Management. He has been a Senior Executive of JP Morgan in Milan, New York and London (in charge of M&A and corporate finance for Southern Europe). Mr. Brunello founded CoFi, an investment bank which was active in asset management, securities trading (a member of the Milan Stock Exchange), M&A and Corporate Finance; CoFi was sold to Credit Agricole and a group of leading Italian entrepreneurs. Subsequently, Mr. Brunello founded Unifortune SA (Switzerland) together with Banque Unigestion Geneva, Republic National Bank of New York and Sopaf (an investment bank listed on the Milan Stock exchange). Mr. Brunello holds a degree in Economics and Business Administration from Bocconi University in Milan. As he is in charge of the Plurima Unifortune Global Strategy Fund, a UCITS fund of UCITS hedge funds that outperformed the broad universe of UCITS hedge funds in 2013 successfully, we were interested to hear how he achieved this and what his market views are. Mr. Brunello, your UCITS fund of hedge funds has outperformed the broad UCITS hedge funds market so far in 2013. How did you achieve that and what is the general strategy of your fund?

Victor Brunello: Since the last quarter of 2012, in the face of a strong, stable and clear economic policy of the ECB and of the Fed to support the economic recovery and employment without limits, Unifortune’s Investment Committee decided to increase the allocation to directional strategies and reducing defensive strategies. In this sense, the long / short equity strategy was increased by about 7% preferring the allocation to value-oriented managers with a long-term horizon and focused on medium capitalization companies, whose price turns out to be less ‘efficient’. Additionally, the allocation to Convertible long-only strategy was increased which benefits from rising prices in equity markets but with a floor given by the bond structure and an active protection sought through the active management of the gamma of the options embedded in the security.

Finally, the allocation to managers that use medium-long term systematic models has been reduced because of the decreased volatility, the uncertainty in the macroeconomic environment – that sometimes reappears in the form of economic data, news about economic policies, etc… – and the increased correlation between asset classes which generate violent spikes in volatility that these models are not able to predict. Broadly speaking, in these conditions these funds generate negative performances without any protective effect.

In geographical terms, the allocation has been re-balanced favoring U.S. oriented managers while reducing managers who invest in emerging markets, which are more targeted towards large cap stocks and therefore more macro-oriented. The slowdown in the GDP growth in some of the emerging countries and the increasing expansionary policies followed by their Central Banks (recently also by the BPoC) resulted in a risk-off environment through out many of these markets.

Regarding the exposure to Japan, a theme which captured much interest this year, the benefits of the equity rally, supported by the government and the central bank, were obtained mostly by macro funds through different directional trades (long equity, short JPY vs a basket of currencies and short government bonds) but with a greater and more effective risk management.

At portfolio level, we also decided to increase the portfolio concentration reducing the number of managers (15) and increasing the allocation to those who we believe would be the top performers. This process has been done considering the risk-weighted allocation which is equally distributed. The fund portfolio shows a strong bias towards L/S Equity strategies. What criteria do fund managers have to fulfill in order to receive investment?

Brunello: Managers in the equity space must have a strong, robust and long track record even if it is realized in their ‘hedge fund’ vehicle. Basically, the choice based on the style of the strategy depends on the macro environment. Since the end of the previous year, we increased allocation to value investors rather than momentum managers because we think the fundamentals of single companies can improve due to a normalization of the economy, mainly in the US.

The quality of the managers, meaning education and background of the key people, compliance and rules over insider trading and market manipulation, especially in the small and mid cap space, and a disciplined way of working from idea generation to trading are the most important drivers in funds’ selection inside the strategy.

We spend a lot of time speaking with managers, reading their compliance manuals and visiting them trying to understand how they approach the management of the companies they invest in, which kind of relationship they establish whit them and what kind of information they receive. It’s not simple to focus on those aspects but it must be the first element to evaluate an investment both in the small-mid cap space and in the large cap where activism is performed.

It’s important for a fund manager to be able to explain the performance in every part of the investment cycle and attribute it to their decisions. At least, the manager must give compelling evidence of any period of underperformance. Did the latest implementation of UCITS IV and the impact on CTA funds change your portfolio allocation or your selection process of those managers?

Brunello: We started investing in CTAs in our portfolios since 2006 or before, considering them a good protection against equity draw-downs because of their ability to go short quickly and diversify their allocation into different and negative correlated asset classes. We benefited from the use of CTA managers mostly in 2008 but in the last few years we gradually reduced exposure to them for two main reasons: for one the volatility has decreased in many asset classes and we face more often violent volatility’s spikes, moreover the correlations between asset classes are continually changing.

On the regulatory side, the new UCITS guidelines state an aim of strengthening investor protection and ensuring greater harmonisation in regulatory practices. As background, the new guidelines set additional criteria to determine which financial indices a UCITS can invest in and specify more detailed requirements on the provision of index information (including publication of index weights). These have led CTA managers to the decision to restructure their funds in the UCITS space.

For all the reasons above, economically and regulatory, CTA funds have lost and will continue to loose in the future most of their portfolio’s protections and probably a second generation of systematic models needs to be developed. What are your market expectations for the rest of 2013 and what influence will this have on your portfolio allocation going forward?

Brunello: Looking at the market signals and macroeconomic data, US are recovering and they can be the locomotive for the rest of the global economy. The European situation seems to be increasingly under control, in addition to the ECB safeguard since the ‘whatever it takes’ speech given by Draghi. Tapering can be an issue but it will start only if the economy improves and it can be consequently a good signal for the market.

Given these observations, the allocation will remain unchanged if market news validate our views. In addition, if some good macro news will come in, the fund will probably experience an indirect increase in the exposure (gross and net), coming from the typical behavior of the managers in our portfolio.

So far, the historical correlation and beta of the portfolio with the equity indexes has been contained. Some of the components of the portfolio, like macro, CTA and FX, can provide natural hedges to systemic events. Thank you for the interview.