The hedge fund targets net returns of 10 per cent to 12 per cent, while the enhanced cash funds aims for 1 per cent over Libor with around 0.5 per cent annualised volatility.
TrinityCapM was founded by a team of fund managers who developed downside-limited value-at-risk methodology for JPMorgan Research, before going on to use the process at Smith Barney Global Capital Management and Citigroup Asset Management.
In return for providing financial backing, MPSAM has gained the right to market TrinityCapM’s products to existing clients and new institutional investors.
Nicola Romito chief executive officer of MPSAM, says the two products will be marketed specifically to central banks and supranational companies, institutions from which he is keen to win large segregated mandates.
He says: “While we are keen to promote the new hedge fund products, it is also very important to offer our clients liquidity funds. Short-term cash funds are particularly popular in Italy.”
MPSAM already offers a wide range of products to institutional investors, including regional equity funds, bond funds, real estate funds, collateralised debt obligations, funds of hedge funds, quantitatively-managed investment strategies and socially responsible investments (SRI).
The deal with TrinityCapM is but the latest in a series of joint venture and sub-advisory relationships forged by MPSAM in pursuit of a strategy to outsource all asset classes in which it lacks expertise. For instance, the firm’s funds of hedge funds are advised by EIM, socially responsible investment portfolios are advised by SAM Sustainable Asset Management, while an alliance has been formed recently with Hines to create a new institutional real estate fund – MH Real Estate Crescita. The new property fund, which is described as a high risk, high return vehicle is due to close soon with €100m.
Another €35m property fund – Ducato Immobiliare – is managed by Morgan Stanley. MPSAM also operates multi-manager funds from American Express, Fidelity, JPMorgan, Merrill Lynch, Schroders and Morgan Stanley.
Mr Romito says that MPSAM has doubled institution assets under management since 2002, with the bulk of the additional money being invested by insurance companies in the firm’s fund of hedge funds which was launched two years ago.
He points to strong growth in demand for funds of hedge funds in Italy in the last two years, where MPSAM has built a market share of 4 per cent. “Fifty per cent of our €5bn of assets under management in funds of hedge funds come from direct investments by insurance companies.
“They face the problem of meeting the guaranteed minimum level of return for their clients in a low interest rate environment. So they are becoming more interested in hedge funds because they want return with low risk without correlation in the market.”
But aside from insurance assets, opportunities to win institutional investment mandates in Italy are still limited and will remain so until pension reform gives rise to new retirement funds.
Institutional openings
Mr Romito observes that the Italian investment market is worth a modest €500bn of which institutional assets account for about 10 per cent. He adds that the institutional market is currently underdeveloped in terms of investment products and pricing.
“We work at a pricing level of between five and 20 basis points,” he says.
As a consequence, Mr Romito says MPSAM is looking to develop and diversify its institutional investment business internationally.
He adds: “We don’t want to be reliant on Italy alone, although we think that market has strong future appeal.”
MPS Asset Management Ireland, Monte Paschi’s Dublin-based investment operation, runs €5bn of assets in funds of hedge funds for Italian institutional investors.
MPS also manages €364bn of institutional money in two Dublin-based active quant global equity funds – Ducato Selezione and Ducato Tendensa – which are advised in Italy.
The Irish-registered Bright Oak funds umbrella is sold to retail investors on an advisory basis only in order, says Mr Romito, to monitor the total return position of each client.
He explains: “The asset allocation system we use looks to manage and monitor a mix of funds for each client. If the clients do not use the advisory tool, then we do not want to sell to them because it would be a big mistake because Bright Oak is a benchmark-driven product and not a total return product.”
Mr Romito dismisses as irrelevant the question of which investment products will be most favoured by institutional investors in the future.
Rather he highlights the importance of service and the ability to understand and meet the particular investment objectives of each individual institutional client.
He explains: “One investment product is not necessarily better than another. Instead it is important to guarantee the return expectations of the investor. To do this, you must sell products that can generate alpha.
“This does not always mean selling total return products because institutional investors which are able to perform their own asset allocation might not require such products.
“In this case, it might be better to sell active mutual funds which offer a return above the benchmark. Also, if you are not in a position to offer all asset classes, you must be able to offer a multi-manager service.
“If you cannot guarantee good asset allocation or service or added return, then you should outsource to someone who can. If you don’t have a sub-advisory system, you can sell only total return products. And if you only offer total return products you are limited to four or five strategies only.”
Strategic thinking
Underlining the importance of the multi-manager strategy to MPSAM, Mr Romito contends that no asset manager can achieve consistently positive relative performance. He says: “It is very difficult especially to find a big asset manager who can do this.”
Consequently, he maintains the asset management industry is going to polarise with specialist boutiques focusing on specific asset classes and large global players, at the other end of the spectrum, continuing to offer a complete range of products that invest in many asset classes.
Mr Romito says it will always be hard for the investor to identify which of the large multi-asset firms has the best performance. On the other hand it is easier to identify the best performers in a particular asset class.
He concludes: “So a good multi-manager offering is an important option for investors, especially because the best managers probably do not have scalable platforms.”
However, the use of specialist managers does not guarantee business success. Since joining forces in January 2003 with Swiss-based SRI house, SAM Sustainable Asset Management, MPSAM has attracted a paltry €50m of retail money for ethical investment. For a firm that announced its ambition to become Europe’s leading sustainable investment provider, the poor response, particularly from institutional investors, is disappointing.
“It is strange but the institutional market is very quiet in this segment,” remarks Mr Romito, adding: “We can talk about sustainable investing but we must always be profitable for our clients. But I am confident of winning institutional mandates in the future even if the market is not yet ready. Pension funds are becoming conditioned to thinking in this manner.”
Despite the recent additions to his investment armoury, Mr Romito ventures a surprisingly cautious growth forecast. He expects MPSAM to increase total assets under management by no more than 10 per cent over the next two years. He does not expect to gain much in a domestic retail market where three successive years of declining assets under management combined with an influx of foreign competition have hit business prospects.
MPSAM is unable to sell its Italian-based products to retail and institutional investors abroad because of the impact of domestic taxes on fund returns.
Mr Romito says: “The performance of the funds suffers and performance net of taxation is a critical point when we sell our funds internationally.
“For instance, we have an agreement with an adviser in Chile to sell products to pension funds. We only sell our Dublin-based Bright Oak funds in Chile. We have not sought authorisation to sell any other types of products because they would not be tax-efficient for investors.”
