Unigestion’s investment principles tell us that it is “not swayed by short-term trends or techniques which are in vogue”. At first glance that might seem a bit rich, considering its reputation for minimum-variance equities – about as “in vogue” as it gets.
But Unigestion was an early adopter under its head of equities Fiona Frick and, as CEO, she has remained a vocal critic of simplistic or overly-mechanistic smart beta products. Elsewhere, the firm commits itself to active management, and Tony Bartlett, head of pensions at Bath and North East Somerset Council in the UK, cited the focus on research and “forward-looking analysis of risks” when the Avon Pension Fund awarded the firm a £165m (€200m) emerging markets mandate this year.
“There has been a lot of crowding in minimum variance, and some things are called minimum volatility or minimum-risk that appear to be more risky than the name implies,” Frick observes. “In particular, we think that they often just exchange volatility risk for illiquidity risk. Some assets are simply not re-priced very often, or auto-correlate because everyone is trying to buy at the same time.”
To minimise risk you must think about it holistically, in other words – it is not just volatility. This is an important aspect of Unigestion’s equity-portfolio research, where work is currently focused on immunising equities from interest-rate risk, because companies with stable cash flows and high dividends have become many income investors’ proxy for bonds. This is a potential weakness in mechanistic low- volatility strategies. In another example, the firm is optimising some clients’ minimum-risk portfolios with inflation as the key risk factor.
And the ‘active’ approach goes further. Once a range of risks is identified, you can optimise your long-term exposures. The next step is to extend that into actively managing exposures, something to which this work on specific risks, like interest rate and inflation, naturally looks forward.
“We want to get to a point at which we can decide to increase or decrease exposures to different kinds of risk – rather than simply minimising them through all points in the cycle,” Frick explains. “If we want to minimise beta, say, do we want to do it via minimum-variance or perhaps through diversification? We started our dynamic switching research in 2013 to pursue these ideas.”
Frick sees this kind of thing as the core of Unigestion’s mission. A research committee meets once a month to monitor the research agenda for which each individual investment manager in each department is responsible. Among key performance indicators “evolution in process, product and research” makes up 20% of everyone’s annual assessment.
“My motto is: research today is performance tomorrow,” says Frick. “I have tried to translate to the Unigestion level what I had been doing for more than 10 years at the equities level. If I were to pinpoint my priority as CEO it would be putting Unigestion at the forefront of innovation in our industry – in process, structure, operations and idea creation – and that means research. If a small boutique like ours doesn’t stay one step ahead, it will be out-competed by the big guys and won’t survive.”
Frick speaks of creating “the atmosphere of a university campus, but with the IT power, market data and risk models you really need to pursue research”. Unigestion is an active member of the EDHEC-Risk Institute’s International Advisory Board, and partners with Cass Business School and the École polytechnique fédérale de Lausanne (EPFL) for academic conferences and postgraduate intern programmes.
But this is far from an ivory tower. As well as being performance-oriented, Frick adds it is also about sharing research with clients, and relying on them to articulate their challenges as a starting point for new research. She cites the genesis of an absolute-return product in a German insurance company’s desire for low-beta access to the firm’s equity return engine; and the many clients trying to build Solvency II-friendly hedge fund portfolios; if Unigestion manages part of a client’s equity portfolio it can also explore how the same tools can help with the rest of that allocation, outside of its own mandate. “It makes sense for even well-resourced institutions to use us as an outsourced research centre,” Frick observes.
That implies a business strategy biased towards sophisticated and pro-active institutional asset owners. Again, Frick sees this as important in competing with industry behemoths: working for thousands of clients of every type just is not practical for an €11bn shop, whereas a couple of hundred closely engaged institutions, with half of the business in segregated accounts, is a perfect fit. Alongside the Avon Pension Fund, the list includes Nestlé Pensions, Next Retail and Railpen in the UK, Switzerland’s IST Fondation d’investissement, and Quebec’s Régime de Rentes du Mouvement Desjardins.
Unigestion is not dedicated solely to improving the minimum-variance mousetrap. Innovation is a priority across all of its investment lines. A major recent research project tackled the problem of analysing private-market risk using the more indicative cash flows as opposed to reported NAVs, for example, resulting in a framework that should enable investors to allocate across this hugely heterogeneous universe optimally for their investment objectives, risk appetite or liability profile.
This raises the question of why the firm has never developed a dedicated fixed-income business. Frick says she prefers to think about fixed income and credit in the multi-asset context, partly because that is how the wider business and its research effort is evolving. Indeed, credit, mixing interest-rate and growth sensitivity, feeds the trend for clients to think about how their risks aggregate across asset classes.
“We see demand for private debt, which mixes hedge fund and private equity expertise,” Frick says. “We see this kind of thing as a great way to encourage our existing departments to work together more and more. That is more powerful to me than creating a new fixed-income team that will talk to itself. I see myself as a bee within Unigestion: I cross-pollinate research insights.”
Frick says the firm has been too “siloed” and is working to create a structure better able to respond to demand in this way. Its cross-asset department looks set to be the platform: it currently works mostly for private clients, but Frick intends to expand it and head it with a new hire from the institutional world.
This idea can be tricky to translate into a product or service relevant to clients that have the wherewithal to do their own asset allocation and risk management, but Frick is clear that the emphasis will not be on broad services, let alone anything that looks like fiduciary management, but rather on tackling specific problems with a cross-asset element. She cites examples such as a client who gets the firm’s risk-management expertise in public equities and wants to extend the analytical tools into independent hedge fund or private-asset allocations; or one that wants to invest its private-equity commitments in risk-managed, return-seeking assets rather than cash.
“There is a natural tendency for clients to move away from the idea that they invest a certain amount in equities and a certain amount in bonds and a certain amount in alternatives,” says Frick, summing up. “We all need to get organised for that.”