Detlef Glow, Thomson Reuters Lipper’s head of EMEA research, reviews a one-on-one meeting with Greg Outcalt, Co-Chief Investment Officer, Alternative Investment Management Group at AB in Los Angeles. Greg Outcalt joined AB in 2010; prior to then he was Executive Vice President at SunAmerica Alternative Investments, where he managed alternative investment portfolios composed of hedge funds and private equity funds since the formation of the group in 1996. Before that, Outcalt was Senior Vice President responsible for the accounting and risk management departments of SunAmerica’s life insurance companies. He holds a BS in accounting from Pepperdine University and an MBA from the University of California in Los Angeles.
Greg Outcalt, AB
Source: AB
During our conversation Greg Outcalt explained why alternative UCITS are so popular with investors at the moment. From his point of view alternatives enhance the performance of the portfolio, since they bear different risks compared to other mutual funds, which helps to diversify the overall portfolio risk. He explained that AB SICAV II Multi-Strategy Alpha Portfolio goes even a step further in this regard, since the portfolio is not only diversified by strategies but also by advisors within the single strategies with seven managers. The employed strategies are long/short equity (20%-60% of the portfolio), special situations (10%-40%), relative value (10%-40%), and global macro (0%-20%). Within the long/short part of the portfolio there is one deep-value manager, who is seen as less correlated to the index; the deep-value portfolio is a high-conviction portfolio built of around 33 stocks with a long-term investment view and that are not based on any kind of index guidelines. In addition, one of the selected managers is a dedicated short-only manager. This position ensures that the fund has no overweighting in long positions. The portfolio manager looks for a net-long position between 30%-50% of the portfolio.
The portfolio is constructed by using a top-down approach to assess the current opportunities and bottom-up manager research. The aim of this combination is to identify the top managers in each strategy and to diversify among managers within the single strategies. In addition, the strategy exposure is adjusted to capitalize on market opportunities and is calibrated to the risk/reward objectives and investment guidelines. With regard to performance expectations, Greg Outcalt said the fund aims to deliver 5%-8% annual returns with a volatility of 5%-8% as a long-term return target.
Portfolio Construction
The portfolio construction process starts with proprietary idea generation that comes normally from independent managers in the extensive AB network. After that the investment and operational due-diligence process starts to identify funds with strong performance and a setup that fulfills the needs of AB, with a focus on infrastructure, compliance, and business risks. To verify the gathered information, the research team at AB runs background and reference checks. Once a list of appropriate research has been conducted, the portfolio management team starts to build/construct the portfolio. All components of the process are subject to an ongoing monitoring process—before, during, and after the portfolio is constructed. This monitoring also includes risk management.
Outcalt thinks a competitive due-diligence process and a strong risk management process are key to achieving these goals.
Risk Management
Greg Outcalt outlined that the risk management process is a function of both the portfolio management team and an external risk management department. With regard to the review process, he said AB uses common risk oversight tools such as RiskMetrics and proprietary models to oversee the:
- Concentration risk: the trade overlap, the allocation limits on the sub-investment manager level, and the position sizes
- Manager risk: the overall regional/sector exposure, net/gross exposure, and the correlation between the sub-investment managers
- Downside risk: cash allocation assessment, stress tests, scenario analysis, and value at risk (VaR) calculations
- Liquidity risk: evaluation of the leverage in the portfolio and a limit on illiquid investments
This analysis enables the fund manager to know the risks in the portfolio and to adjust the portfolio with regard to the risk factors identified on a sub-investment manager level.
Fund Selection/Due Diligence
The fund selection process at AB starts with a quantitative analysis. Since the best way to evaluate the portfolio management skills of a given manager is past performance, the track record during different market conditions is analyzed. Greg Outcalt explained that AB has employed multiple data vendors to ensure that as many hedge funds as possible are included in the analysis. The next step of the assessment process is the due diligence on the product, manager, and business setup. The result of this qualitative research is stored in a due-diligence database. This in-house database is one of the unique propositions of the highly experienced investment team (over 16 years of market experience per team member on average) at AB Alternatives Investment Group.
Within the quantitative part of the process the analysts try to identify fund managers who have demonstrated relevant hedge fund experience, have a high-quality track record, use a fundamental approach with a longer-term outlook, and offer an alternative fund with a high overlap with the flagship hedge funds of the respective manager.
If this process works, it can’t yet be proven by the performance of AB SICAV II Multi-Strategy Alpha Portfolio, since the fund was launched only in July 2015.
With regard to the minimum investment horizon that investors should hold the fund, Outcalt explained that investors should have the same time horizon as the fund, i.e., three to five years, to fully participate in the investment approach of AB SICAV II Multi-Strategy Alpha Portfolio.
The author acknowledges that he has no holdings in the fund mentioned in the article above.
