Fideuram Asset Management (Banca Fideuram Group) is a quantitative asset management company which adopts rigorous quantitative techniques both in stock selection and asset allocation. A disciplined approach permits the company to improve the general investment technology with strong risk management tools. At the stock selection level a tracking error optimisation approach is implemented with respect to each benchmark defining a specific asset class.
At the asset allocation level we
follow a stochastic multi-period dynamic approach, taking explicitly into account: the client requirements in terms of investment horizon and different types of financial objectives (intermediate cash out and target wealth, final target wealth, spread over a benchmark portfolio, etc); the forecasts on the relevant market dynamics provided by a forecasting model by means of a scenario tree; the risk policy determined by our investment committee.
The forecasting model relies on macroeconomic fundamentals and describes the most likely paths of the explanatory variables of the asset classes returns. It also provides forecasts of the main characteristics (mean, standard deviation, correlation, skewness and kurtosis) of the multivariate distribution of the asset classes returns.
The investor is Euro-based and each quarter the forecasting model is estimated. The investment committee approves the forecasts and fixes the risk policy parameters.
The following portfolio has been proposed for the fourth quarter 1999 to a five year-horizon investor with a single financial objective: a final target wealth corresponding to an internal rate of return of 4% in real terms on an annual basis. According to the investment strategy, the asset manager optimises dynamically the portfolio at the asset allocation level, to maximise the expected return and to minimise the downside risk with respect to this
specific financial objective.
Compared to a similar investor in the third quarter, we have significantly increased the exposure in the Euroland area, particularly in the fixed income cash segment, we completely abandoned the US bonds market, but maintained a small portion of the portfolio in US equities. We slightly reduced our position on the Japanese market, although confirming our positive outlook, a view held since the first quarter 1999. With respect to the Euroland area and Great Britain, the position has been overweighted for the fourth quarter with the exception of Italy, that has been underweighted.
In the Euroland area, the macroeconomic scenario provided by the forecasting model for the fourth quarter can be summarised as follows: there are signals of an incipient economic recovery together with increasing interest rate expectations. The fundamental equity market forecasts remain positive and offset the potential interest rates increase. The expected strengthening of the Euroland economy is due more to an improved internal not external demand. Under these favorable conditions inflation is expected to remain subdued.
Given the expected Euroland and Japanese recoveries, the US is no longer the only healthy economy. Capital flows have started to leave the new continent producing some concern for its current account deficit sustainability and dollar weakness. Given the inflation pressures that the FeD expects from the labour market and commodity prices and, therefore, the fear of increasing interest rates and its impact on the equity market, the risk on US stock market is increasing.
Our strong view on Japan derives from the virtuous cycle arising from the expansionary monetary policy of the Bank of Japan that has revitalised the Japanese financial market together with domestic demand through a newly found consumer confidence. These last two quarters strengthening of the Yen has led
to huge capital inflows and repatriation of capital by Japanese investors. If, as it seems, the yen has found
its equilibrium level, no higher
pressure on exporters will come from
the exchange rate side and the
Japanese economy will continue
towards recovery.
Antonio Verna is director of quantitative research at Fideuram Asset Management in Rome

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