Bankia’s head of funds of funds remains a strong proponent of moving clients to higher-risk profiles. “Clients coming from deposits only should accept 1-1.5% volatility, Bankia’s most conservative fund of funds. More risk-prone clients should accept from 5% to 6% or 7% volatility. If you want to continue earning the same yield as in the past, you have to accept more volatility.”
Downside control
However, chasing yield for his clients is not Martín Sauto’s main priority. “When looking at a fund, we always start off with a deep analysis of the volatility, and especially the drawdown. That’s the most important quantitative analysis tool for us,” he explains.
To analyse equity funds, Martín Sauto even takes into consideration the Sortino ratio, a measure that only looks at the downside volatility of a fund and is predominantly used by fixed income investors. Consequently, it is not a big problem for him if a fund underperforms during bull markets. It is when markets turn that a good manager shows his worth, according to Martín Sauto.
His clients are an important driver of this conservative attitude. “They won’t forgive us if we lose money. They expect us to make money during positive business cycles, and above all limit drawdowns during downturns. If you fail to do the latter, they will ditch you and try for themselves.”
It is little wonder Martín Sauto prefers managers with a conservative investment style. “A fund we buy might not even be in the top third of funds. For us, style is more important than returns,” he says.
The fact he is a conservative investor does not mean he avoids riskier asset classes, even when they are universally loved. “We increased our exposure to emerging markets last year, but we did it slowly and in very conservative way,” he says. Funds he bought include Robeco Emerging Conservative Equity and Nordea Emerging Stars.
The Robeco Emerging Conservative Equity fund is a good fit with Martín Sauto’s investment strategy (see chart). It has been markedly less volatile than its reference MSCI emerging markets index over the past couple of years, thanks to an overweight in stocks with stable cashflows in the telecoms, utilities and consumer staples sectors.
It has missed some of this year’s upside, however, as the fund is underweight cyclical and growth sectors such as financials and information technology. But that is not a problem for Martín Sauto and his clients as (low) volatility is key for them.
