Currently, this is evident in the firm’s other predominant theme – outside of the income focus – a tilt toward growth in its non-income-focused fund that has been running for the past couple of years. Although, partly because it has performed as well as it has, O’Rourke says the firm is considering dialling that growth tilt back somewhat.
Strategic allocations
At a strategic level, the firm is of the view that equities still represent good value, and long term the yield in government debt is too low to justify holding in large amounts. The firm is actively looking at new diversifiers, such as long/short equity, CTA strategies and other liquid alternatives.
While not bearish on the US, the firm does not see fantastic value on offer there. Instead, he says it is seeing more value in Europe and remains cautious on emerging markets. On a relative basis, however, the argument for equities over bonds and cash remains strong.
“There has been a lot of talk that we are well into what’s been a strong market for six or seven years now, but we do think underlying conditions suggest that monetary policy will continue to be supportive,” he says.
“There is no real sign of inflation coming through. We still see the current volatility as an opportunity to participate. We feel it has a sufficiently long leg to run and current levels represent good entry points looking out longer term.”
And while O’Rourke admits this view does not rule out the prospect of continuing drawdowns from current levels, they are very unlikely to be of the scale we saw in the financial crisis.
The firm is also pretty constructive on the high-yield space, having been somewhat more cautious on the sector last year. “We think spreads have moved sufficiently, and that while there’s risk, obviously (spreads could move out more in energy), we think the risk/reward looks good over the medium to long term.
The firm has also built up its convertible exposure, O’Rourke says, pointing out it has a dedicated convertibles fund of funds that holds around eight managers and has almost €1bn in AUM.
Asked what he thinks has changed in the industry over the past decade, O’Rourke points to the growing prevalence of passive investment options as a major difference.
“The rise of passives has really put the focus on active managers. They need to demonstrate they are taking genuine active risk. There is probably more to go but I think managers recognise that.
“I think as portfolio constructors ourselves we recognise that. And while it does not guarantee performance, managers do have to take positions against the benchmark on the balance of probability to get that performance.”
The other major change, he says, is the growth in the importance of outcome-oriented solutions. “About 10 to 15 years ago, things were much more focused on performance relative to a benchmark. That is not the case so much now.”
Mediolanum’s key manager qualities
People
“Quality of people is high up the chain in terms of our decision-making process. We want to see a team that is stable, experienced and that has seen both good and bad times.”
Incentives
“We work with different types of firms, from large insurance or bank-owned asset managers to pure boutiques. Even within bank-owned entities, we like to see a boutique culture associated with the team we are considering. We need to see they are properly incentivised and there is alignment of interest with the end client.”
Process
“We are always trying to look for some differentiating feature in the strategies we review. We are looking for something you either don’t have or that makes sense in the context of what you are holding – some type of value-add you think the team could deliver over the medium term. At the same time, we want to see consistency, we want to see track record and we want to ensure that what they say they are going to do is actually reflected in reality.”
Active management
“We want to see active expression in portfolios, whether that’s through portfolio concentration or expressed through factor exposure.”
Transparency
“We need to see right through the portfolios to ensure we know exactly what the managers are doing and that we are able to actively manage our risk.”
