Alessandro Greppi from Zurich Insurance is our Fund Selector of the Month

Alessandro Greppi is a Unit Linked portfolio manager at Zurich Insurance, where he focuses on developing tactical asset allocation models, models based on artificial intelligence for selecting ETFs and mutual funds, ESG products, and cross-asset technical analysis.

Greppi is also a board member of IFTA (International Federation of Technical Analysts) and SIAT (Italian Society of Technical Analysis) and a former member of the scientific committee of SIAT (2019-2022). Since 2019, he has been a lecturer at the Master's in Technical Analysis of Financial Markets held by SIAT (Data Science module), teaching financial statistics, machine learning, big data, portfolio analysis, and sentiment analysis of social networks using R.

Could you tell us about Zurich Insurance's fund selection process?

Zurich Insurance's approach to fund selection is based on several factors. The first one is a qualitative and financial analysis in which both the robustness of the strategy and the management company are evaluated. In addition to the criteria guiding the allocation choices, the competencies in a particular area or sector, and the size of the research and analysis team are also taken into account.

No less important is the evaluation of a fund from a quantitative and financial perspective, with the aim of identifying the instrument with the best characteristics within a peer group by examining risk and performance metrics. Finally, in the case of requiring an ESG evaluation of a particular fund, external providers' support is utilized, who make their ratings available.

How many people are in your team and how is it organized?

The Zurich Investments Life Unit Linked team consists of four people, including one manager who primarily focuses on defining the team's strategy and product development, while I manage portfolios from asset allocation to fund selection. Two other specialists who deal with operational activities support the activities and assist me in the portfolio construction and fund selection process.

What parts of your job do you find most challenging? And what are the most interesting parts?

One of the most challenging parts of my job is understanding whether a fund's historical performance will be repeatable in the future. It is therefore crucial to understand the investment process, how a portfolio is composed, and how risk is managed. An accurate evaluation of these aspects allows for an understanding of the circumstances in which an instrument may face greater difficulties and how much the underlying investments expose to idiosyncratic or asymmetric risks.

In fact, when selecting a fund, there may be a temptation to prefer the instrument that simply offered the best outperformance within the respective peer group, but it is essential to consider that managers rarely confirm their performance for consecutive years. Instead, one of the aspects that I believe most rewards during the selection phase concerns the evaluation of a manager's abilities during the most challenging market phases, as in times of greater turbulence, the chances of any weaknesses in the investment process or risk management coming to light increase.

Regarding the most interesting part of fund selection, I enjoy observing the ability of some managers to identify and select the companies that will lead the trends of the future before others. In this way, a simple analysis of a fund's underlying assets allows for capturing new perspectives on both the economy and the world to come.

What are the processes for identifying a good fund manager? What are the differences between a good manager and a less skilled one?

The process of selecting a good fund manager is not only about analyzing the track record but also, and above all, the underlying investment philosophy.

Indeed, in my opinion, a talented manager is capable of adapting and changing their strategy based on the economic context and the availability of new asset classes. In addition, a good manager is one who can distinguish themselves from others in the most difficult moments where uncommon analysis skills are required to generate performance. It is therefore crucial for an asset manager to be able to attract and retain talents that allow them to build a competitive advantage over other entities and, at the same time, lay the foundations for a future of brilliant performance.

Regarding the differences between a good manager and a less skilled one, I will try to give an answer that is as generalizable as possible, even though, in the moment of choice, it is necessary to evaluate the type of fund we are about to invest in.

The first consideration concerns the portfolio turnover. A contained turnover, in the order of around 30%, indicates a strategy that can be considered "buy and hold." The higher the percentage, the greater the trading activity carried out on that portfolio.

Another aspect that can help us distinguish between a good and a less skilled manager concerns the number of positions in the portfolio. It is likely that the best manager has no exposure to securities that they do not have a positive opinion on. A reasonably concentrated fund suggests that the manager is expressing their point of view with conviction. On the contrary, an instrument in which the number of positions is higher than what would guarantee good diversification indicates a lack of strong ideas on the part of the fund manager.

The last aspect that can allow us to distinguish between managers concerns the tracking error compared to the benchmark of the fund. An excessively low tracking error may indicate that a manager is simply replicating an index, offering ETF returns at the cost of active management. A high tracking error is not a guarantee of outperformance but is simply evidence of active alpha-seeking by the manager through a positioning that diverges from that of the benchmark.

How are you addressing the current inflation and market volatility?

In this phase, the main challenge consists of estimating the trend of inflation and how persistent it will be over time. The difficulty in making assessments is attributable to the fact that this shock is the result of a series of events that began with the post-pandemic reopening and subsequently amplified by excessively accommodative monetary policies for too long and by the energy crisis.

As a result, the impact on the economy and markets of these events has reduced the importance of past performance in the fund selection process because the current scenario is very different from the pre-pandemic one. In this context, broad diversification and balanced positioning can represent the ideal mix to manage uncertainty, even though in 2022, the increase in correlation between stocks and bonds has questioned the role of fixed income as a source of diversification.

To best address financial markets still focused on issues such as inflation, energy crisis, and recession, I believe it is appropriate to reward exposure to high-quality companies' stocks with high pricing power or those that pay high dividends. As for fixed income, we are instead interested in the 5-year maturity curve as it offers attractive yields without taking on duration risks that are not adequately compensated by the market.

What are the sectors and trends that you think will perform better in the second half of 2023? 

The first few months of 2023 have been a transitional period, as many of the themes that characterized 2022 also marked the beginning of this year. Equities could benefit from a period of reflection by central banks, but the impact on earnings that an increasingly likely recession could have invites caution in portfolio risk.

In this context, I think high dividend stocks that can generate high levels of cash flow may be less susceptible to volatility during a period of global economic slowdown. The latter part of the year, in which an economic slowdown is expected to manifest, could instead favor the outperformance of more growth-oriented sectors if interest rates begin to sharply decline.

Despite the turbulence that also characterized fixed income in 2022, I remain of the opinion that we are approaching a pause in the cycle of rate hikes by the Fed. It is less clear what the ECB will do, as it remains focused on fighting inflation.

This scenario allows us to gradually add duration to portfolios, with a preference for the 3 to 5 year part of the curve. However, I still believe it is premature at this stage to take exposure to longer maturities given the profound inversion of yield curves.

Regarding credit, we believe that to limit the impact of a possible widening of spreads, it is preferable to focus on short-dated European investment grade corporate bonds.

What do you like to do when you are not working?

I am an avid reader. In my free time, I love reading books of all kinds, although lately I've been focusing mainly on topics related to innovation and geopolitics. I'm also very athletic - while I no longer have the time (or the knees) to play basketball, I always try to make space in my days to go to the gym or for a run, even at the most absurd hours.

Additionally, as a member of the board of directors for the Society of Technical Analysis (SIAT) and the International Federation of Technical Analysts (IFTA), I am involved in teaching and organizing training courses for institutional investors who want to explore the world of artificial intelligence and data science applied to financial markets.