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Is ‘extraordinary alpha’ process-driven… or simply luck?

The challenges of a modern portfolio mean it’s not enough to simply identify good managers, says Raiffeisen’s Eva Polly


David Robinson

In her two decades at Raiffeisen Capital Management, Eva Polly has been through the full gamut of market conditions, from raging bull markets to rampant sell-offs.

“It’s hard work finding fund managers who can produce alpha over the long-run,” she admits. “A lot can happen.”

When a manager does produce ‘extraordinary alpha,’ Polly says there is one overriding question: is it process-driven or simply luck?

It’s not an easy question to answer and Polly relies on a team of experienced staff at Raiffeisen’s Vienna headquarters to try and dig out the answer.

Some history

Born in Graz, Austria’s second city, Polly joined Raiffeisen, the country’s second largest bank, in 1990 after leaving school. After working her way through the business, she joined the bank’s asset management arm in 1999.

In 2013, she took over as head of manager selection and now leads an eight-person team that manages three funds of funds for retail clients worth about €3.2bn. Her team presides over a dizzying array of assets and sectors.

Only by working as a team ­­– utilising different talents and skillsets – is it possible to stay on top of such a wide-ranging brief, she explains.

“Different strategists are responsible for their own area, such as equities, bonds or alternatives, and each one has their own way of making a decision about a fund manager,” Polly says.

Many of the strategists have built up their specialist knowledge over some time, often both on the sell and buy-side.

“Because they have a lot of experience they’re able to ask the right questions,” she says.

Funds meeting the Raiffeisen team should expect a rigorous examination.

“We like one-on-one meetings because we really want to develop an understanding of the person who manages the fund and get a feeling about their breadth of knowledge,” Polly says.

Any fund that merits consideration must have minimum assets under management of €100m, a track record of at least three years and be registered for sale in Austria.

Crucially, there needs to be a clear investment philosophy in place that stands up to scrutiny. “There has to be a coherent strategy and the manager needs to stick to it,” Polly says.

“During interviews, we challenge the rationale behind past investment decisions. We decide whether the process fits with the portfolio and whether the portfolio fits in with the market environment. We ask a lot of questions.”

Digging deep

Prior to exhaustive one-on-one grillings, the Raiffeisen team conducts a rigorous analysis of a fund’s data as part of its due diligence process. The group relies on reams of Morningstar stats aided by its own internal software to crunch the numbers.

“The quantitative process is very time-consuming,” Polly says.

At the forefront of the team’s concerns will always be costs. “We are not interested in performance before cost,” Polly explains. “If we have two funds more-or-less equal in quality, we will always select the cheaper one.”

Efforts to keep costs down mean that index-trackers are part of the mix – however Polly will general use them for tactical asset allocation rather than for long-term holdings.

“ETFs are particularly useful when the investment time horizon is short,” Polly says. “If you only plan to invest for a month, for example, it makes sense to use an ETF.”

More than half of global fund selectors use passive funds to make short-term tactical moves, according to survey last year by Last Word Research (see chart).

In August, Swiss asset manager Gam made headlines when it liquidated its €9.5bn absolute return bond fund range and suspended fund manager Tim Haywood.

The group’s handling of the incident sparked debate about the risks investors face when they invest in unconstrained funds that contain complex derivatives and swaps among their holdings.

Unconstrained bond funds have been labelled the ‘canaries in the coal mine’ of the financial system because of their exposure to risky derivatives. Two large Bear Sterns unconstrained bond funds were liquidated months before the global financial crisis began a decade ago.

“You need to be careful with unconstrained bond funds,” Polly admits. “We keep a really close eye on any in our portfolio.”

The tricky ESG knot

Another area that Polly has had to deal with in recent times is ESG. Austria has one of the most progressive green agendas in Europe – it regularly tops tables for municipal recycling rates, for example – and these concerns loom large in its investment landscape.

“Issues around sustainability are becoming more and more present in every area of business – on the demand side as well as the supply side,” she says.

As more funds trumpet their ESG credentials to cash in on burgeoning investor demand, Polly is among many in the asset management industry to fret about ambiguities in the definition.

“Not every fund which is labelled sustainable is genuinely sustainable,” she says. “It’s one of the biggest research challenges we face.

“Everybody – whether they are retail or institutional clients or asset managers – has an individual definition of what they understand to be ‘sustainable’ investment. It’s not easy to handle the subject in a self-evident way.

“Dedicated ESG due diligence – the evaluation of the investment process and the input and output – is of elementary importance for us.”

Two strategists in Polly’s team are responsible for sustainability and integrating mandatory ESG requirements into the investment process and making sure all ESG products meet Raiffeisen’s – and the clients’ – requirements.

“There is no single platform that provides all the information needed to make effective comparisons between funds and their respective sustainability input,” Polly observes. “We need to be convinced by the quality of the ESG credentials.

“The responsible strategist [at Raiffeisen] will ask a lot of questions to help them make the decision and the fund manager needs to have an ESG strategy that stands up to scrutiny.”

As with every investment the team at Raiffeisen preside over, Polly repeats, there needs be a coherent strategy “and the manager needs to stick to it!”