6 March 2018
It immediately becomes clear that Roberto is inspired by the concept of constraining volatility and managing risk, so we begin by discussing how this interest was stirred.
Naturally inclined toward risk awareness
“I began my career in 1998 with Reuters. At that time, in addition to providing the newswire and website services they are commonly associated with, Reuters also owned a consultancy and design business which sold the Kondor+ risk management tool. This was one of the major products used by proprietary trading desks and Treasury departments to aggregate and monitor daily risk exposures. It was a very sophisticated tool, which was eventually sold to a Private Equity firm in 2011 and I liken my role, in the formative years of my career, to that of a junior product specialist. So, I got to meet with major financial institutions and learnt how much they valued risk transparency. This exposure cultivated a natural inclination towards risk awareness in portfolio management when the opportunity came to move into this field a couple of years later.
“I then moved to Allianz Global Investors in Milan, where I initially worked in the risk management team, but grasped the chance to manage portfolios with both hands in 2000. Even now that I can look back on 17 years of portfolio management, I really value my earlier experience in quantitative finance and risk management, which continues to influence the way I build portfolios from a ‘risk conscious’ perspective. It also reflects the culture at Allianz who were pioneers in launching and managing the first capital protected products in the Italian retail market.
“However, the concept of discretionary management always captivated me and, in 2006, I launched my first merger arbitrage strategy. The process worked well from day one and I have finessed it over the years. I joined GAM in July 2016 and immediately launched a new strategy based on an enhanced version of that same approach. I still also lean on knowledge I gathered when studying for my degree in Business Administration at “L.Bocconi” University in Milan, as this is really complementary to the quantitative aspects of running the strategy. The overall approach combines financial analysis with legal considerations and quantitative finance methodology. It is also heavily influenced by the principles of diversification and maximum concentration, so it really is the epitome of a blended approach.”
A love of open water
As we move on to discuss personal interests, it quickly becomes clear that Roberto is not an indoor guy at all, so he is desperate to use his free time to compensate for being stuck in an office.
“I love open air activities and I am a very passionate sailor, so it is perfect for me to live so close to the lake in Lugano. However, there is nothing quite like sailing on the Mediterranean. I have a small Olympic-type dinghy, which is quite sporty, so I can really feel the natural power of wind and waves.
“When I’m not sailing, I still like to be at the water’s edge with fishing rod in hand. It is great to be in touch with nature and disconnect myself from the stresses and strains of everyday life. Obviously, anybody that goes fishing regularly will know that it is an activity that requires patience, but it all becomes worthwhile when you get a really big bite. Last May, I was fishing quite close to the office when I was lucky enough to hook a 12 kilo pike. This is my greatest angling achievement to date and I just couldn’t wait to share the story with my colleagues! I love the sport because it pits the wits of humans against fish, who have a few tricks of their own. The challenge is to lure the fish out of the safety of the depths, so it’s not the same as hunting because you are competing on a much more level footing.”
Family, food and Floyd
“I have two children (aged 7 and 10) and they have already led quite rich and diversified lives for ones so young. As a family, we have relocated twice in the last five years (spending three years in Frankfurt where I developed a taste for fine German beer!), so the kids have already benefited from a Pan European upbringing and the associated linguistic and cultural experiences. They have also had the opportunity to mix with kids at different types of schools in diverse locations, which has provided them with multiple perspectives on life.”
"Having said that, they were obviously born Italian so I’m sure this is their favourite cuisine and the same goes for my wife and me. One of the real downsides of moving around is missing out on proper Italian eating. While we obviously like to cook Italian in our household, it is not the same as the sheer number and variety of dishes that are served in a typical restaurant back home.
Of course, we also eat a lot of fish and I revel in the traditional role of being both the founder of the feast and its principle consumer!
While Roberto is clearly a passionate man, music does not really arouse the same sense of excitement as fishing and sailing.
“I can’t say that music plays a big part in my life but I do like a bit of Pink Floyd. My favourite album is ‘The Wall’ which was first released in 1979 and was later turned into a film with the screenplay written by vocalist and bass player Roger Waters. While I was not old enough to attend a concert at that time, I rectified this in 1989. Floyd played at the Formula 1 track at Monza, which is obviously a very unusual setting, but one that easily accommodated a live audience of 120,000 people. That was a very special occasion and a memory that will live with me well into old age.”
Harvesting merger arbitrage premiums
Music may not mean that much to Roberto, but it is clear from his body language that he is inspired by his day job and he breaks into a smile as we revert to the topic of the investment strategy that he has been cultivating for almost 12 years
“The rationale supporting the strategy is that the opportunity set benefits from permanent drivers associated with liquidity and behavioural logic. After a takeover is announced, existing investors in the target company are typically keen to crystallise the large paper profit relating to the initial share price movement. At this point, their pay-off becomes both binary and negatively asymmetric, with the short-term upside being restricted to the residual spread (perhaps low single digit) while the potential downside becomes the total takeover premium that has just been incorporated into the share price. Consequently, these ‘natural sellers’ exert some downward pressure on the share price, effectively keeping the spread open and ensuring the opportunity is structural in nature.
“Intuitively, it makes sense to harvest as many arbitrage premiums as optimally possible, since a large number of positions provide greater diversification of idiosyncratic risk. In this respect, a portfolio comprising of 60-80 different M&A opportunities is not only diversified in its own right – which helps to limit the drawdown risk – but also constitutes a useful source of diversification in a portfolio context. The major driver of risk and return is the completion of M&A deals, which is not directly related to the direction of markets or the level of volatility. As such, the fund exhibits a low correlation to fixed income, equity and alternative strategies, which is one of its most compelling attributes.
“In order to maximise potential risk-adjusted returns, it makes sense to focus on the small to mid-cap segment of the market as this is where the least crowded positions can be found, offering greater premiums for absorbing the same risk of the transaction failing to complete. In fact, such a bias also reduces the risk of any given deal being vetoed for antitrust reasons, since transactions involving lower-end caps do not tend to impact the competitive structure of the overall business case.
“I believe the real appeal of this strategy is that we aim to harness bond-like returns and behaviours from a market-neutral equity portfolio. As such, we offer a solution to many investors who are looking for alternative sources of meaningful yield with low volatility. This is a particularly attractive proposition in an environment where low interest rates and credit-spread compression have made it increasingly difficult to harness such attributes through traditional fixed income funds.”
Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.