Playing it safe
Another challenge he faces is the risk aversion of his client base – Italian investors’ preference for fixed income is almost proverbial. Record-low bond yields have not succeeded in dampening appetite, with bond funds having seen four times more inflows than equity funds year-to-date (see Italy net flows chart below). Many Italians even
put all of their pension savings into bonds, says Viviani.
He cites the clients of the two companies that are merging with Old Mutual Wealth Italy (see box on page 9) as an example of that. “Clients of Eurovita and Ergo Previdenza invest through segregated mandates, which are invested almost exclusively in government bonds,” he says.
Old Mutual Wealth’s unit-linked life insurance clients can opt for a more balanced solution, if, for example, they choose to invest in Old Mutual Wealth’s model portfolio, which allocates equally to bonds, equities and alternatives.
Viviani believes his clients would do well moving to a higher risk profile with a bigger weighting to equities to improve long-term return prospects. But have his clients heeded this advice? No.
“Most of them haven’t changed their risk profile and remain very bond-focused,” he says. A reason they don’t feel any urgency to shift is that bond yields are significantly higher in Italy than in most other European countries.
“Italian government bonds still yield 2%,” says Viviani. “In Spain, it’s only 1.3%. With the current level of inflation [1.2% y-o-y in July], Italian investors are happy with the current yields.”
It’s all about Omega
The bond focus of his clients is reflected in Viviani’s preferred fund selection metric: the Omega indicator, which is a kind of enhanced Sharpe ratio. “This is the starting point in our fund picking process,” he says.
“Omega is our official risk-adjusted return indicator that we use to score funds,” Viviani explains.
“It can be used as an alternative to the Sharpe ratio. Unlike Sharpe, Omega doesn’t assume a normal return distribution. It therefore includes a higher level of information than the Sharpe ratio, which is calculated from return data that has been averaged or annualised. Omega gives us a detailed picture of how volatility is distributed within a certain time period.”
While volatility measures such as Omega are typically used to analyse fixed income funds, Omega is also the most important quantitative metric for both bond and equity funds for Old Mutual Wealth.
But what other things do Viviani and his colleagues look at? Read that on the next page