‘Good risk management also means accepting that you can make mistakes’

Grazia Cozzi
Head of Fund Management, EFGAM Schweiz

 

You have been an active Fixed Income Manager for three decades. How has your perception of risk and how to handle it changed during your career?

I started back in 1998 and few months later, the LTCM (Long-Term Capital Management) crisis occurred: what an event! At that time, I was a junior fund manager, and seeing all my new graphs on Bloomberg changing so rapidly I felt really disorientated, but – lesson learned - I immediately understood the importance of taking in account risks in dealing with financial markets. And year by year I saw the approach to risk was changing. In the late 90’s risk was only considered ex-post, so sometimes when it was too late because decisions had already been taken; nowadays, also thanks to technology and process innovation, the concept of risk has increasingly moved to the forefront of the decision-making process. In EFGAM we have some Funds which consider risk as a pillar of their innovative Investment Processes. We do acknowledge which and how much risk we’re adding to the portfolio before acting.

Would you describe yourself as a risk averse person?

It’s extremely hard to be risk averse when dealing with financial markets. What really matters is to be always aware of the risks that you are taking and to be able to have them under strict control and to manage them properly when something unexpected occurs. Thanks to recent technology developments (our risk model considers more than one million synthetic yield curves) one feels stronger and safer in taking decisions: you know where you’re going when following and respecting clients’ needs.

In Asset Management risks can be modeled or calculated. What kind of personal or soft skills are necessary to be successful in managing risks?

Risk is a measure of probability, either modelled or calculated. The main soft skills to be good at managing risks are being humble and accepting that as a portfolio manager, you could be wrong. You must always be willing to learn and look forward. Additionally, you have to be curious, eager to know, proactive, strong conviction based and perseverant. Positive attitude is also key, synergies and team approach will do the rest.

As markets have become more volatile has de-risking of portfolios become a main concern of clients?

In recent quantitative easing environment, lower yields pushed many investors to take more risks to achieve a higher return (sometimes underestimating the consequences). In some cases clients suffered in terms of performance and most of them asked for a more cautious approach on risk, so de-risking has become a natural attitude and current rates and yield curves are helping to adjust expectations and, consequently, allocations. This is one of the main reasons why we decided to strengthen our risk process, developing an innovative investment philosophy. We call it “Shield investment process”. It embeds ex-ante risk management and qualitative methods directly into the process to improve robustness and minimize risks via smart diversification within universe. Two Shield’s funds have been successfully launched on Short Term Investment Grade universe in the last two years following this cutting-edge risk process.

A few years ago, there was a wave for passively managed fixed income portfolios. Now it seems the trend reverses. Did you see that coming?

Active and passive management has always been a topic of discussion in asset management. Under quantitative easing regime being passive could be a good solution (low interest rates and huge amounts of liquidity meant low default rates), even if buying all the market constituents never allows to differentiate by selecting best opportunities and avoiding investments that we think could be at risk. Even more so now that we are in a very different rate environment, we strongly believe that active asset management, backed up by a rigorous risk process, is key to satisfy clients’ needs and preserve their capital in a professional way. We aim to follow synergies between a qualitative approach (experienced fund managers) and quantitative, innovative techniques (with the help of a dedicated team) to deliver good results and try to minimize the impact of any reason for underperforming. Utilizing this approach you’re able to know your risks before you do any trades, and so the decisional process considers risk as a starting point.

EFGAM has a strong presence in Lugano, a financial center which is better known for its focus on wealth management for private clients. How does asset management fit in that ecosystem?

EFGAM is an international provider of actively managed investment products and services to professional advisers and institutional investors around the world. EFGAM is a very dynamic place to be where our international culture and entrepreneurial minds are committed to deliver best results to our clients. In Switzerland we are based in Lugano, Zurich and Geneva, and roughly half of the EFGAM colleagues are based in Lugano, covering different roles. Asset Management in Lugano historically has an ancient presence in Private Banking, which is still very well connected to our internal and external clients. Here in Lugano proximity to wealth management for private clients is really well established: long standing relationships and proactive engagement are the main pillars to create value for our clients. To conclude, last but not least, I’m really proud that the innovative investment process focused on risk that I previously alluded to was born here in Lugano!