Proactive monitoring and deselection: key factors in manager evaluation

Giorgio Carlino, Head of Multi-Management at Mediolanum International Funds (MIFL).

In this interview, Giorgio Carlino, Head of Multi-Management at Mediolanum International Funds (MIFL) reveals his his perspective on the current macro environment, his criteria for selecting exceptional fund managers, the monitoring framework in place to evaluate their performance, and the current asset allocation of MIFL's model portfolios. We also discuss the challenges that lie ahead for the team and the evolving trends in the mutual funds market.

How do you see the current macro environment?

In the face of high interest rates, global GDP growth is likely to slow to 2.9% this year and remain lacklustre in 2024. As we reach the midpoint of 2023, the global economy is facing several unusual events. US unemployment sits at its lowest level since 1968, while core inflation is higher than it was in 1983. The Federal Reserve along with the European Central Bank have raised rates at their fastest pace in 40 years and 30 years, respectively. They are also set to trim their balance sheets at a record pace, along with the Bank of Japan.

Both the US and Europe are likely to avoid recessions, even as central banks continue their campaigns to slow inflation. But economists believe that global GPD growth will slow to 2.9% in 2023, down from 3.5% in 2022.

However, there are some bright spots for the year ahead, with outperformance forecast in emerging markets, particularly in Asia. China’s opening and recovery could have a huge impact on its GDP growth for 2023, while trends such as digitalization continue to support India’s economy. 

There are a few themes we can expect in the second half of this year, including a soft landing in the US, a pickup in European consumption, a continued reopening and recovery in China, and a growth revival in Japan.

What criteria do you use to select a good manager?

Our primary focus is being able to evidence high-quality decision-making by linking the investment process to the outcome. We note that exceptional managers have a particular edge that allows them to outperform over the long term. Therefore, the identification of a manager’s edge and having confidence that the edge is sustainable are critical aspects of our selection process.

Importantly, we do not screen or select managers based on past performance. This embeds outcome bias in the process: for example, it assumes that a good performance always comes from a good manager. Past performance in isolation – instead – is not indicative of skills and experience.

Furthermore, our focus is not simply on the managers with the largest levels of AUM as this may simply represent a combination of a strong marketing positioning and charismatic manager.

In terms of edge – we have identified five specific areas and overlay this with what we believe matters in the asset class to add value over time. For example, does the manager have a behavioural edge in being able to display patience and discipline to maintain their investing approach through challenging periods? Have they evidenced an ability to capitalise on opportunities?

What can make you doubt him?

We have a structured monitoring framework in place comprising both qualitative and quantitative criteria. This captures areas such as consistency of investment approach, team and firm stability, liquidity, capacity and risk management.

Monitoring a manager is approached as an ongoing reselection exercise with the primary objectives of proactive deselection should we view a deterioration in a manager’s edge; or avoiding capitulation and terminating a manager at the trough in their alpha cycle. For each manager on our Buylist, we have key monitoring points which alongside our structured monitoring framework serve as a compass for deselection.

What is the current asset allocation of your model portfolios?

The fund MBB Global Equity Style Selection is currently comprised of six style-specific managers. The fund overall is currently positioned in favor of Europe, the overweight is coming in particular from the value-oriented managers as they are finding a lot of cheap companies in the region. On a sector basis, we favor financials and healthcare and have zero exposure to the real estate sector.

What challenges have you set yourselves within the team for the coming years?

Asset management is a people business, as Simon Sinek like to say 100% of our clients are human, and 100% of our employees are human, so we need to make sure we take great care of them. Only great and engaged teams can achieve consistent and superior results, this is what we are focusing on.

Our objective is to be the best Multi-Manager House out there, to achieve that we want constantly look at how to improve selection and portfolio construction; through team and personal improvement we strongly believe we can be the best in what we do.

Looking ahead to the next few years, what type of mutual funds do you think the market is moving towards? Is the market moving towards?

Among the main benefits of mutual funds, in the past, there was further diversification and the chance for small investors to access strategies that otherwise would have presented too high barrier to entry. Today the situation has evolved as investors’ needs did, with a market becoming more and more sophisticated.

Investors are now more focused on the relevant consistency between the product itself and the investment process to design it. This makes the manager selection process even more relevant, in the sense that it allows to scout the more suitable fund managers in a product development process that is becoming extremely specific.

This is particularly true for ESG products, where we don’t only seek to select managers who are more specialized in each specific theme, but we also want to identify those trends that are most likely to grow and benefit from the huge investments that will be required to meet the ESG objectives fixed by world governments in the next decades.

Through manager selection, we aim to spot those companies that are most likely to grow on the back of ESG trends, becoming the new 1 trillion companies of the future. In this sense, ESG shouldn’t be interpreted as a synonym of better performance, but the chance to invest in high-growth-speed themes and stocks, helping clients to realize their objectives of long-term capital appreciation.