1.Asset Management Program Universit Bicocca April 2006

2. ProgramsInvestment Process / Asset AllocationMacroeconomicsEquity InvestmentBond InvestmentAlternative InvestmentQuantitative Techniques and RiskManagement Fideuram Investimenti SGR1 3. Investment Process / AssetAllocation Fideuram Investimenti SGR 2 4. Fideuram Investimenti SGRFideuram Investimenti is Banca Fideurams Asset Management Firm, responsible for all the companys investment issues Fideuram Investimenti SGR employs 100 people, entirely involved in the asset management process: consultancy, asset allocation, fund management Assets Under Management stand at around 50 bln Euro: 4th largest Asset Management Company in ItalyProducts: different kinds of SICAV, Mutual Funds, Pension Funds, Hedge Funds, Multimanager Clients: private and institutional (Foundations, Pensions Funds, Banks). Fideuram Investimenti SGR 3 5. ORGANISATION ASSET ALLOCATIONMUTUAL FUNDS DIVISIONMacro QuantitativeAnalysisanalysisForecasting andEquity Strategy OptimisationBond Risk ManagementFideuram Investimenti SGR4 6. Investment Process Step 1: Identify investors characteristics and goals Step 2: Forecast risk and return for each asset class Step 3: Construct Optimal PortfolioStep 4: Choose the financial tool for each asset classStep 5: Execute Trades Fideuram Investimenti SGR5 7. Step 1: investor s characteristics and goalsDefine: Time HorizonRisk ToleranceApproachbenchmark driven (relative return)risk driven (total return)Set of asset classes (equity, bond, cash, corporate, high yield, hedge fund, private equity)Responsibility : Private BankerFideuram Investimenti SGR 6 8. Strategic and Tactical Asset AllocationASSET ALLOCATIONOUTPUT Exposure vs benchmark in terms of: GPF Progress 5 anni BenchmarkAsset Class Country Currency DurationFideuram Investimenti SGR 9. Step 2: forecast risk and return Relative returns in financial markets are predictable Economic intuition and qualitative judgment must besupported by empirical evidence (econometric model,quantitative analysis)Use investment themes that consistently drive returnsacross global markets and asset classes (long-termvaluation, short-term momentum, fund flows, riskpremium, macroeconomic policy) Responsibility : Asset Allocator, Economist, StrategistFideuram Investimenti SGR 8 10. Step 2: forecast risk and returnHow do we forecast Identify a set of factors, which can be expected returns? grouped into broad investment themes Forecasting Theme RationaleMacroeconomicTrade off growth inflationValuation Distance between price and fundamentals Fund Flows Liquidity goes into some asset classes more than othersMomentum Rapidly appreciating assets often continue to appreciateRisk PremiumExcess Return to invest in the market Fideuram Investimenti SGR 9 11. Step 2: forecast risk and return Factors Commonly Used in Forecasting Absolute and Relative Market Returns Asset Class Variable EquityMultiple (PE, PB, PCF) Price Momentum, Earnings Revisions Corporate cash flow (Buy Backs, Issuance) Liquidity (M1, M2, Monetary Policy)Yield Curve Bond Policy Output Gap Inflation Spread over Treasury Corporate Balance Sheet RatioInterest Rate Differential Currency Futures on Interest Rate (Eurodollar, Euribor) Fideuram Investimenti SGR10 12. Step 2: forecast risk and return Compare your expectations with market expectations Growth DCF Implied Earnings GrowthInflationBreak Even Inflation (TIPS, O.A.T) Interest RateStrip of Futures on Interest Rate (Eurodollar, Euribor)Volatility Implied Volatility on Option (VIX)SentimentRisk PremiumFideuram Investimenti SGR11 13. Step 2: forecast risk and return FUTURES: implied interest rates Eurodollar (Dec-06)- LEFTEuribor (Dec-06)-RIGHT5.503.705.40 3.50 5.305.20 3.30 5.105.003.104.90 2.90 4.804.70 2.70 4.604.502.50 06060606 66 6 66 66 66 66 6 /A 00 00 00000000000000000000 #N 20202020/2 /2/2/2 /2/2 /2/2 /2/2 /2/26/ 3/ 3/ 7/13 2027 10 1724 1017 2431 17241/ 2/ 3/ 4/1/1/1/ 2/ 2/ 2/ 3/ 3/ 3/ 3/ 4/ 4/ Fideuram Investimenti SGR12 14. Step 3: Optimal PortfolioMust have a framework to move from predictability toportfolio construction It requires a solid asset allocation tool (Mean Variance,Black-Litterman) and systematic approach to riskmanagement Maximise the trade-off between expected gain andvolatility of tracking error, given the clients tolerance forriskResponsibility: Quantitative Research TeamFideuram Investimenti SGR13 15. Step 4: Investment ToolsPortfolio Expected Return = asset class return + alfageneration costs (management fees and trading costs) Identify Optimal trade off between costs and alfageneration The more efficient a market is, the less worthwile it isto pay costs for alfa generation (Active Funds). Concentrate costs where Alfa generation is high. Investment Tools: Mutual Fund, ETF, Derivatives, HedgeFund.Fideuram Investimenti SGR 14 16. Step 5: Execute Trade Implement incremental portfolio that reflects currentviews and alpha strategy Careful attention to transaction costs, market liquidity, risk constraints and client guidelines. Responsibility: Fund Manager, TraderFideuram Investimenti SGR 17. Equity InvestmentFactors driving equity markets returnsEquity markets performance of the last 3 years. What s next? Alfa Generation: TOP Down vs Bottom Up Approach Quantitative techniques for equity investments Fundamental analysis and equity valuationFideuram Investimenti SGR 18. Equity InvestmentEquity Portfolio Expected ReturnBETA + ALFA Market Return + Extra-return vsCurrency Return benchmarkFideuram Investimenti SGR 17 19. Beta: Market ReturnCurrent Dividend Yield Market Return+ Dividend (or Earnings) growth + Change in Multiples (PE, PB, etc)Factors changing Multiples Liquidity Sentiment Earnings CycleFideuram Investimenti SGR18 20. Beta: factors driving market returns MacroMetrics: Economic Growth, inflation, Markets with best trade off growth / Yield Curve inflationTool: Macroeconomics analysisValuationMetrics: Multiple (PE, PB, DY), Fair Markets look cheap compared to Value (DDM, DCF), Relative (B/E Yield) history, fundamentals or other Tool: Fundamental analysis, quantitative asset classmetrics Metrics: EPS Growth, margins, sales Earnings cycleTool: Fundamental analysis, quantitative Dynamic of earnings growthmetrics LiquidityMetrics: Monetary policy, yield curve, M1 Liquidity available for financial/ M2, currency reserves, excess liquidity, investmentscorporate cash flow.Tool: Research, Balance Sheet Analysis Momentum Markets and currencies have strong Metrics: Price Momentum recent outperformanceTool: technical analysis Fideuram Investimenti SGR19 21. 2002 2005: what was behind the equity market rally? MacroGlobal Growth (3.5% real growth), withoutEnvironment inflation (2% CPI Core).Central banks loosening monetary policy afterLiquiditymarket collapse and September 11th. Zero real interest rate, excess global liquidity. ValuationEquity market cheap after 2000 2002 collapse on multiples and relative to bondsMomentum StrongGlobal Profits at record level. Restructuring andEarnings cyclemargins expansions. Best markets not besteconomy (Europe vs. USA and China) All the factors were supportive from the equity market perspectiveFideuram Investimenti SGR 20 22. 2006: whats next?MacroStill supportive. Strong growth in 2006 2007, reasonable inflation expectations. Risk: US budget and trade Environment deficit, dollar collapse, Brent spike. Changed. Major banks in mood to tighten up (US, Liquidity Europe, Japan). Excess liquidity shrinking.Still reasonable. Multiples in neutral area, equity still Valuation attractive vs. bond. Equity market up no more than earnings (non multiple expansions)Momentum StrongStill robust, but the best is over. Margins and EPS growth Earnings cycledecelerating. Earnings revision still positive. Some factors are changing from the equity market perspective Fideuram Investimenti SGR 21 23. Equity markets perspective 2002 2005 NOW Macro++ ++ Valuation+++= Earnings Cycle +++= Liquidity+++=/- Sentiment / Momentum ++ +++Conclusion: equity market still reasonable, but the best is over. Trends up, no major upside. Consolidation phase with more volatility.Fideuram Investimenti SGR22 24. 33 -4-3 -2-1 0 1 2 3 438 8 3375 4 3411 9 34 LiquidityUpdated 03/31/0648 4 3484 9 3521 5 3558 0 3594 5 3631 0 3667 6 Fideuram Investimenti SGR3704 1 37 34 40 -3 -2-10123 6 US INDICATORS 3333777 1 34 6983813 7 35 06 383 50 235 429 35 794Market Valuation 36 159 36 524 36 890 37 255 37 620 37 985 38 351 38 23 716 25. Earnigs RevisionsMsci The World Index1,500 0.45 1,400 0.35 1,300 0.25 1,200 0.15 1,100 0.05 1,000 -0.05900-0.15800-0.25700-0.35 95 96 97 9899 0001 02 03 04 05 06Price (L)Up_Dow n_Total_30days FY1 (R) Fideuram Investimenti SGR 24 26. Earnings Growth Msci USA next twelve months expected vs actual growth 25.00% 20.00% 15.00% Expected Actual 10.00% 5.00% 0.00%03 1 03 2 03 303 404 104 204 304 405 105 205 305 406 106 2 06 3 06 4 20Q20Q20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q 20Q20Q20QMsci USA25.00% 20.00% 15.00%ExpectedActual10.00%5.00%0.00% 2003 200420052006Fideuram Investimenti SGR 25 27. Equity portfolio: alfa generationEquity marketsUsa, Europe, Asia, Japan, Italy. Emerging Markets Benchmark SP500, Eurostoxx, Topix, Han Seng, MSCI.Fund Managers IssueBeat the benchmark.HOW CAN A FUND MANAGER BEAT THE MARKET?Fideuram Investimenti SGR 26 28. Equity portfolio: alfa generationTop Down Approach Market Exposure beta exposure futuresCurrency exposurehedging - ForwardSector Allocation Energy vs Financials Style AllocationValue vs growthSize Allocation Blue Chips vs Small CapFactor Allocationsensitivity to macro data (inflation, interest rates, industrial production, etc)Fideuram Investimenti SGR27 29. Equity portfolio: alfa generationBottom up approach: Stock Selection ValuationEarnings Quality Profitability Are market prices coherent Were earnings derived from What are the companys with firms fundamentals?sustainable sources? profit margins? How Metrics: Metrics: efficient are its operations? Price / Earnings, DDM, DCF,Accruals-to-total-assets,Metrics: Price to Book, ROE break Change in net operatingEarnings-to-sales ratio, Sales-to- down.assets total-assets ratio, EBIT-to- enterprise value, Forecast earnings-to-priceMomentum SentimentManagement How has the market Are analysts upgrading orWhat is company responded to the companys downgrading their view ofmanagement strategy and changing fortunes? this company?behaviour? Metrics: Metrics: Metrics: Short-term reversals, Medium-Earnings forecast revisions, Net external financing, term continuations, Long-termRecommendation changes Change in shares reversals Outstanding, Company visitsFideuram Investimenti SGR28 30. Equity portfolio: alfa generation Portfolio optimisation maximises risk- adjusted expected return Country and currencyexposure Sector exposureTransaction costStyle exposure PortfolioestimatesOptimisation Active bets Size exposureOptimal portfolioFideuram Investimenti SGR 29 31. Our approach: philosophy and aims Extra-return vs Bcmk 200 / 300 bp per year DisciplinedRule for portfolio construction and rigorous Approach risk management, Absolute (VaR) andRelative to bcmk (RVaR, Tracking Error)Minimising Costs Lower trading costs mean higher portfolioreturns Two PhaseDefensive Phase (optimisation)Active Phase Immunisation vs a diversified set Bottom upapproach. Two of risk factors (market, currency,Sources of alfa generation: sector, style, size exposure) quantitative model and fundamental analysisFideuram Investimenti SGR30 32. Equity portfolio: alfa generation Defensive PhaseEvidence shows that performance vs. benchmark is drivenmore by bets you are not conscious of (factor risk exposure,stock you dont own) than active bets you are aware of.To maximise expected gains with respect to benchmark andsubject to a constraint of tracking error, it is important toisolate sources of alfa generation. Optimisation Process High number of stocks (80% market coverage)Market and currency neutral (beta 1)Sector Neutral Monitoring of Style and Size Bias Fideuram Investimenti SGR31 33. Equity portfolio: alfa generationActive PhaseTwo Sources of Alfa GenerationSource 1 Source 2Quantitative Model Fundamental Analysis Multifactor model, covering over 600 Analyst / Fund Managers for most stockssectors Transparency (no black box) Proprietary valuation model (DCF + Break up ROE) Testing of different sets of variables (fundamental, technical, valuation) for Qualitative study of the company each sector (sector analysis, company visits, management presentations) Basket of stocks sector neutral Backtest over 12 yearsFideuram Investimenti SGR32 34. Investment ProcessThree Blocks 1.Portfolio Low Tracking Error 2.Quantitative Basket (80 100 stocks) 3.Fundamental Basket (proprietary valuation model) NO exposure toMarket, Currency, Sector, StyleAlfa concentrated in Stock Picking Product responsibility = Risk Allocator Team Quantitative AnalystsFund Managers /Sector Analyst Fideuram Investimenti SGR33 35. Construction of Quantitative Model Sectors Market Selected VariablesRanking of Stocks in Each Utilities BanksEnergy Sector Cash FlowP/E Price to BookSTM DividendEV/EBITD Sector ConstructionYield1.GDF 1.UBS1.BP Portfolio Construction2.E.On2.BPM2.ENI3.Enel3.Santander3.Repsol4. 4.4.UBS, BPM, GDF, E.On, Enel BP, ENISantander SSMFideuram Investimenti SGR 34 36. Results: EuropeSpread Long vs Bench 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%-2.0%-4.0%-6.0%Jan-97Jul-97Jan-98Jul-98Jan-99Jul-99Jan-00Jul-00Jan-01Jul-01Jan-02Jul-02Jan-03Jul-03Jan-04Jul-04Jan-05Jul-05Jan-06 Apr-97 Oct-97 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Back test : January 97 Information Ratio 1.81 Universe: MSCI Europe Hit Ratio 72.2% Performance with dividends: Total Return Max Drawdown-7.49%Annualized Return13,10% Fideuram Investimenti SGR 35 37. Results. USA Spread Long vs Bench10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Jan-98Jul-98Jan-99Jul-99Jan-00Jul-00Jan-01Jul-01Jan-02Jul-02Jan-03Jul-03Jan-04Jul-04Jan-05Jul-05Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Back test : January 98Information Ratio 1.36 Universe: MSCI USA Hit Ratio 65.6% Performance with dividends: Total ReturnMax Drawdown-6.34% Annualized Return 9,30% Fideuram Investimenti SGR36 38. REFERENCES Strategic Asset allocation: Portfolio choice for Long Term Investors, Oxford University Press, 2002.The Term Structure of the Risk Return Trade Off. Financial Analysts Journal, January / February 2005Investment Valuation Damodaran Wiley Finance - 2004Winning the Losers Game Charles D. Ellis - 2004