John Ricciardi is the aforementioned fund manager and one of the main brains behind the quantitative processes that drive the investment strategy for the Kestrel Opportunities Fund and, in particular, the Kestrel Global Portfolio.
To give an idea of the thinking behind the £30m global fund’s design, Ricciardi says: “The idea is to replace a wealth management service with a daily dealing Ucits portfolio in a concentrated space that gives a core of global assets with fully dynamic asset allocation and daily liquidity.”
Blank sheet of paper
It was launched in April this year with Ricciardi as lead manager and Max Royde as its co-manager. Ricciardi is the more experienced of the two as his CV, littered with institutional and retail multi-asset roles, including head of global asset allocation at Alliance Bernstein and head of asset allocation at Iveagh, would indicate.
The blank piece of paper that the two of them had to start building Kestrel IP’s investment process 18 months ago was not quite as blank as it seemed as, thanks to Ricciardi, it is at least 26 years old and has already seen six global investment cycles.
The emphasis for the Global Opportunities Fund is to provide the core of a portfolio, and the two have no qualms about pitting its structure directly against Ruffer, Troy Trojan, Newton and other higher profile propositions.
How they do it, according to Ricciardi, is by challenging some basic fund management assumptions.
“Particularly for global assets,” he explains. “We are moving from the idea of a long-term, strategic, fixed allocation across multiple assets, or in alternatives which would be the absolute return space, to something that combines the structural, optimised asset allocation typical of pension funds and dynamic asset allocation techniques.”
Tech savvy fund group
The asset allocation decisions are made by Ricciardi and Royde, though the information they have access to that allows them to make these decisions is made available thanks to the technology they have in place and the four engineers they have on the payroll that deliver it. There are not many fund groups that have a chief technology officer (Ravi Kishore Booka in this case) at the heart of what they do.
Booka and his team have invested hugely in systems that allow the managers to read through anything relevant that is published online, generating forward-looking opinions thanks to analysis of leading indicators and projections, inflation analysis, debt, deflation, commodities, the economic cycle, investment styles, stock market valuations, US housing statistics and so on. They look at 1.4 million data points every morning.
Their own online library is staggering and refreshed at least each month to weed out the old reports and make sure everything is kept up-to-date.
The backward-looking, historical information is the usual suspects of technical charts, valuations, market pressures et al that generate a further 4.4 million data points.
“We know everything that people are writing out there. It is taken from the web, as well as what people send us. There is so much information out there, you don’t need to subscribe any more. We do subscribe to some very specific data and analysis, but for the thematic analysis we find what is already there.”
Avoiding data fatigue
It really does look very impressive indeed, though realistically it is impossible for them to read through everything they have access to – there is simply too much danger of ‘analysis paralysis’ with the amount of data they generate.
Ricciardi is at pains to emphasise however, that this is 100% discretionary – “it is a quantitative process but it is not a black box” – and that the ultimate decisions are made by him and Royde. They meet weekly to essentially make three decisions: what should the overall risk position be? Should they make any tactical asset allocation shifts? What should their currency exposure be?
While all three are obviously important to get right, their view is that 75% of returns are generated by the level of risk they are willing to take. Of the remaining 25%, about half comes from asset allocation and the way they are exposed to risk, while the rest is split evenly between randomness and manager or security selection.
The fund targets returns of 8%, with a volatility of around 12.5%. The 8% return is quite high but, as Ricciardi says, it comes from two sources: “One is the long-term base case, which would normally be a mix of assets generating around 3.5% real return.
“The other is our dynamic asset allocation, which historically has allowed us to give investors about 20% of the volatility of the fund in extra returns after beta.”
Perhaps surprisingly, he is also an advocate of market timing.
“This is market timing, it is designed to do that. Quarter by quarter, we are right up-front, it is market timing. What we do is give the portfolio a set of risk characteristics that are appropriate for the coming quarter.”
So the fund is put together using a stack of quantitative information with the human overlay of Ricciardi and Royde that allows the dynamic approach as the final act in the combination of the number gathering, data crunching and then thematic analysis.
How it breaks down
This approach is demonstrated by the fact the fund was launched into a market correction, of what they thought would be around 10%.
The fund therefore held 55% in risk assets and then managed its way through the 10% fall and then moved back up the risk scale in chunks of 5% before, in June, they reached 75% in risk assets.
They get most of their exposure, typically around 80%, through direct investment, with the only funds they hold being equity long/short or hedge funds. The due diligence on these funds is done by Hilltop Fund Management.
Sovereign bonds they hold directly; they use ETFs; for equities they replicate the indices; Reits are their property allocation; commodity exposure is through ETCs; for private equity they have their own basket of providers; cash is managed through custodian banks.
Ricciardi and Royde trade on the experience they provide and their know-how in acquiring assets at as low a cost as possible, knowing what is or is not appropriate in terms of collateralisation, how and when to trade around the world.
As managers of a new fund, they will be judged on their process, that continues to evolve after at least 26 years, and how they perform.At the moment it is so far so good, and as Ricciardi said: “It is doing what it is supposed to do. It got us out during the correction and it got us back in.”
Summary
Kestrel Investment Partners launched its global portfolio six months ago but it was designed thanks to more than a quarter of a century of expertise in global asset allocation techniques.
It relies heavily on quants and technology for data gathering and analysis but the ultimate investment decisions are made by John Ricciardi and Max Royde.
The asset allocation results in index replication and low-cost investment strategies including ETFs, ETCs and Reits.
