Aletti Gestielle uses SAS Risk Dimensions to calculate financial portfolio risk

Since 1984, Aletti Gestielle Sgr, an integral part of the Banco Populare Group of Verona and Novara, has administered delegated portfolios and promoted and managed personal investment and pension funds. In the management of the capital entrusted to it, Aletti Gestielle, as with all savings management companies (SGRs), is also required to meet certain ethical dictates and precise regulatory requirements. Article 40 of the TUF (Italian Amalgamated Law that regulates financial matters) is clear: Management companies must act with diligence, correctness and transparency. They must also try to organize their activities in such a way as to guard against taking risks capable of damaging the interests of their clients.

The concept of risk in financial investments is closely connected to any profits as well as to possible losses. It is no coincidence that, over the years, analysts and experts have prepared specific indicators to assess the risk level of a particular security or an entire portfolio. Aletti Gestielle has created financial models in collaboration with SAS which are intended to measure both absolute and relative risk of managed investment funds.

Three objectives
"The world of asset management is complicated. This is why we set out to develop a model that at least in part resolves the limitations present in many financial models,” says Francesco Betti, head of risk management at Aletti Gestielle. “Only by calculating measurements of absolute and relative risk, such as the VaR [Value at Risk] or the Expected Shortfall, can we respond to the two fundamental questions that every capable portfolio manager needs to ask: ‘Am I able to preserve the capital?’ and ‘Am I able to beat the benchmark?’”

When Aletti Gestielle decided to create a model it had three objectives in mind. Explains Betti: “The first was to introduce some quantitative parameters into the investment process that would show how much capital was put at risk and what the real stakes were against benchmarks; the second was to align the existing limit system, based on the concept of ‘monetary exposure’, with a limit system based on the concept of ‘probable exposure’, namely financial risk; finally we wanted to assess the processes, choices and results of the management in terms of performance adjusted according to the risk (risk-adjusted performance).”

Business intelligence is the key to synergy
“We needed to equip ourselves with new intelligence, new processes and new information systems that are ever more advanced and capable of evolving alongside us,” says Betti. “Nowadays, flair and creativity are no longer enough to run a company or to manage a portfolio. To avoid mistakes, ability is not enough: you must have the right tools available. Business intelligence is in this sense a new way of viewing the company as a tangle of relationships, in which the vertical ties based on the hierarchy leave room for horizontal relationships based on planning ability, innovation and change. This implies a complete revision in the ways of running the company, allocating priorities and doing business.

“Synergy is obviously a key word. At first we could only talk about it, but today there are business solutions capable of making it possible. And it was for this very reason that when we decided to entrust SAS with the creation of the model we were guided by the need to have a technological partner capable of dynamic project planning and that was ready to follow us in all the refinements of the model. We were not looking for a standard solution, because a standard for these problems does not exist, or if it does, it is already out of date.” SAS was chosen “because we needed a software solution that was also a language with a robust statistical basis and good applications in both the financial and industrial fields.

“Moreover,” continues Betti, “we wanted to capitalize upon everything that Aletti Gestielle had developed in risk management over the past two years (in terms of databases, classifications, levels of analysis and knowledge), and only a modular solution would enable us to do it.” Betti realized that projects connected with setting up sophisticated risk calculation systems are generally very long-winded (such that among the risk managers, it is said that “no sooner have you seemed to finish when you find that another risk appears that you hadn’t thought about at the beginning”). “We gave ourselves an ambitious objective: to create a sophisticated multi-dimensional model with advanced pricing (like the binomial branches for the convertible bonds or the historic simulation of the credit spread for the bonds), and all in only 120 days – a blink of an eye for projects of this type, that only the determination of my collaborators and the strong commitment of the management of the company enabled us to achieve.”

SAS provides a ‘view of the risk’
What Aletti Gestielle and SAS have put in place is a model based on the historical simulation of the returns and on the full valuation of the derivative products. “It is a model that does not impose a form of distribution but simulates it,” explains Betti, “and does not assume that the returns average out to nothing and distributes them as if the probability of loss is always the same as that of profit.”

Moreover, it is a multi-dimensional model which provides a “view of the risk” in hundreds or thousands of possible ways, strictly in line with the investment process in place. Finally it is a model that tries to represent a fairly wide spectrum of portfolio risks (price, rate, exchange), including the non-linearity risk of derivative products, the credit risk of corporate issues and the country risk of bond issues from developing countries.

This enables the company to focus on bringing new strategies alongside those developed by the existing internal performance attribution system. To achieve this result, a good nine hierarchical, drill-down variables have been adopted (asset type, industry sector, industry group, industry subgroup, geographic area, country, currency, rating class and duration band). However, the project does not limit itself to this. It, in fact, provides the basis for the development and introduction of a monitoring system capable of offering management more powerful instruments for the governance and assessment of the investment processes.

Today the company is already seeing benefits “in terms of the rationalization of flows and of know-how,” concludes Betti. “But these are the medium-term objectives that I place the most importance upon: concepts such as risk allocation, risk budgeting and risk controlling put life into an irreversible process that cannot be turned around. Like any evolutionary process, the risk process is not very fast, but it is pervasive. Analysis is currently under way into extending the SAS solution to the management of private, VIP and institutional portfolios.”

Aletti Gestielle came to understand the fundamental awareness that every financial investment carries with it, by the very nature of things, risks that are more or less severe but also, and this is the key point, more or less predictable. In other words, what the savings management industry is slowly taking on board is that the more efficient the measurement and monitoring of the underlying risks, the more efficient the portfolio management. This is a change in prospect that in the near future everyone is going to have to take into account.

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